Australia’s Inflation Gauge cooled on the month but edged higher on the year, keeping inflation worries, and RBA hike risk,front and centre.
Summary:
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The Melbourne Institute’s monthly inflation gauge rose 0.2% m/m in January, a sharp slowdown from 1.0% in December.
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The annual pace edged up to 3.6% y/y from 3.5%, keeping the signal consistent with inflation that is still uncomfortably sticky.
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The print lands at a sensitive moment for policy, with recent data (notably Q4 core inflation) already lifting expectations of a more cautious, or even tighter, RBA stance.
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A recent Reuters poll (reported Friday) showed a clear tilt toward a February 3 hike, highlighting how quickly the policy narrative has shifted back toward inflation control.
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Bottom line: a softer monthly read helps at the margin, but the still-high annual pace keeps pause/hike risk in play until the official CPI confirms a convincing downtrend.
Australia’s Melbourne Institute Monthly Inflation Gauge posted a modest rise in January, with the index up 0.2% on the month after a much larger 1.0% gain in December. While the monthly pace cooled sharply, the annual rate ticked higher to 3.6% y/y from 3.5%, keeping the broader message one of inflation that is not yet comfortably back in the Reserve Bank of Australia’s target zone.
Because the Melbourne Institute gauge is designed to provide a timely read on consumer price trends using an approach aligned with the ABS CPI framework, markets often treat it as a “temperature check” rather than a decisive signal on its own, particularly when the move is small. (Note, though, the importance of the data has diminished now that the Australian Bureau of Statistics provide monthly CPI readings in Australia.) Still, the direction of travel matters: the annual rate edging higher, even as the month-on-month pace moderated, fits with a theme investors have been grappling with since late 2025, disinflation is proving bumpy, and underlying pressures are not cooling as smoothly as policymakers would like.
That context is important because the RBA has already been pulled back into a more hawkish conversation. Australia’s Q4 2025 inflation profile, especially on underlying measures, ran firmer than expected, which has lifted market pricing for tighter policy and sharpened the debate around whether the central bank can safely sit still. A Reuters poll reported late last week showed most economists expecting the RBA to lift rates at its February 2-3 meeting, a sharp reversal from earlier expectations of an extended hold.
Against that backdrop, the January Inflation Gauge delivers mixed comfort. The smaller monthly increase is the kind of reading that, if repeated, would help rebuild confidence that inflation is moderating. But the slightly higher annual pace is a reminder that inflation outcomes are still running above levels consistent with a durable return to the RBA’s target band.
For markets, the practical takeaway is that the Inflation Gauge is unlikely to change the near-term policy debate by itself. Instead, it reinforces the idea that the RBA’s next steps will remain tightly conditional on incoming official CPI and activity data. If inflation continues to print “sticky” and demand holds up, the RBA may be forced to maintain a restrictive stance for longer—and the risk of a hike remains alive.
They are sitting around the policy table today and tomorrow at the RBA.
This article was written by Eamonn Sheridan at investinglive.com.