Tim Hext: What inflation signals for next rate move

Inflation is higher than the RBA would like, but does it mean a rate hike is a certainty? Pendal’s head of government bond strategies TIM HEXT explains what it means for investors

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IF THE Reserve Bank was hoping for inflation data that gave a clear reason to hike or to stay put, they did not get it this week. 

The final result for the December quarter trimmed mean (underlying) CPI was 0.9% for the quarter and 3.4% for the year.

Headline was 0.6% for the quarter and 3.5% for the year.

On its own, this should be reason for an RBA hike. These numbers are clearly above the 2-3% target range and 0.2% above the year-end forecasts back in early November.

Combined with a recent pick up in employment and consumer spending it suggests an economy at or near capacity.

The market agrees and now has a 70% chance of a February hike and economists’ predictions are divided in a similar way. (Bonds, however, had a small rally as the urgency for successive hikes was not there. )

But , if the RBA was disposed to more caution, the argument goes that inflation has moderated from the third quarter to the fourth quarter and is likely to continue to do so.

Our early call is for Q1 trimmed mean to be nearer 0.8%.  Hiking rates now would risk a welcome recovery in consumer spending and growth.

This will make for robust discussion at next week’s RBA board meeting, perhaps revealing the balance of “hawks and doves”.

(While we will see the board’s voting numbers — and potentially another split vote — we do not get to see individual votes.)

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What did the inflation numbers show?

The Good 

In December the pressure areas of housing — rents and dwellings — only went up by 0.2%.

These have averaged nearer 0.4% for the second half of 2025. Overall they remain above 4% for the annual growth but this result was encouraging. 

A number of consumer items showed some deflation. Clothing and footwear, plus furniture and equipment fell, bucking the unusually higher numbers of the last six months. 

The OK 

Electricity prices are now flat. All the subsidy noise of the last 12 months are now out of the system.  

Fuel prices were slightly up but overall prices are largely flatlining. 

Health prices actually fell but this was another government policy led item as the government attempted to increase bulk billing. Health will remain a key problem area and grow above 4% in the year ahead. 

The Ugly 

Travel prices are booming.

They grew 16% in December, but that is partly seasonality. Over the quarter they were up 4.6%. Domestic travel was up 9.6% from a year ago, although maybe the Ashes boosted that somewhat.  

Key problem areas for inflation

The three key pressure points for inflation remain housing, health and education.

Between them they are around 35% of the CPI basket and they are all running above 4%. 

Health and education are largely wages driven, though some private schools seem determined to increase by more than wages.

Housing is a well-known structural story that may gain some medium-term relief from slower population growth. 

We will be keeping a close eye on upcoming wage agreements, including the Minimum Wage decision (due in June) to see if the recent spike in inflation feeds back into wages.

This is key — not for whether the RBA goes in February, but whether cash rates are closer to 3% or 5% in the medium term.

Is there any good news ?

The good news is that while inflation will be sticky above 3% for most of this year, it’s far more likely medium term to push back down below 3% than above 4%.

We are not on the brink of another high inflation episode (absent a black swan supply shock or major oil price spike).

The following graph shows that both goods and services have been tracking up nearer 4%.

Even though services will remain sticky, goods prices should track back to closer to their longer-term average of 1%.

With goods one-third of the CPI basket this means service inflation can remain at 4% and overall inflation still be sub 3%.

 CPI Goods and Services components, annual movement (%)

If you’d like to hear more about how Pendal’s Income & Fixed Interest team is positioning for this environment, please contact us through our accounts team

About Tim Hext and Pendal’s Income & Fixed Interest boutique

Tim Hext is a Pendal portfolio manager and head of government bond strategies in our Income and Fixed Interest team.

Tim has extensive experience in banking, financial markets and funding including senior positions with NSW Treasury Corporation (TCorp), Westpac Treasury, Commonwealth Bank of Australia, Deutsche Bank, Bain & Co and Swiss Bank Corporation.

Pendal’s Income and Fixed Interest boutique is one of the most experienced and well-regarded fixed income teams in Australia.

Find out more about Pendal’s fixed interest strategies here

About Pendal

Pendal is a global investment management business focused on delivering superior investment returns for our clients through active management.

In 2023, Pendal became part of Perpetual Limited (ASX:PPT), bringing together two of Australia’s most respected active asset management brands to create a global leader in multi-boutique asset management with autonomous, world-class investment capabilities and a growing leadership position in ESG.

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