Inflation surge leaves Jim Chalmers with no more rate cuts

The rise in inflation leaves Jim Chalmers with no more rate cuts, and a big decision to make on whether to extend electricity rebates.

Jim Chalmers and the RBA were blindsided by a surge in inflation on Wednesday.

Households should not expect any interest rate cuts for years and ­prepare for higher rates in 2027, leading economists have warned, after Jim Chalmers and the ­Reserve Bank were blindsided by a surge in inflation driven by rising electricity prices.

Inflation recorded its highest quarterly rise in more than 2½ years, hitting an annual rate of 3.2 per cent, with electricity prices up 23.6 per cent, placing further political pressure to extend the ­Albanese government’s $6.8bn federal rebates.

The Treasurer played down the higher inflation reading, comparing it to the rate of inflation during the Covid pandemic.

“Inflation has ticked up today, but it’s much lower than what we inherited,” Dr Chalmers said.

He said the government’s rebates for electricity, which economists say have hidden the true headline inflation rate, could be extended if the RBA’s preferred measure did not settle within its target range of 2 to 3 per cent. “Our policies including energy rebates … have helped to directly reduce inflation when it was at its peak, to allow time for the structural ­drivers of inflation to settle and for underlying inflation to return to the RBA’s target band,” he said.

Members of the Albanese ­government’s welfare working group are pushing Labor to end the power bill rebates, which are due to expire in December, and ­instead funnel taxpayer money into ­renewable energy for poorer Australians to help them reduce power prices.

Opposition Treasury spokesman Ted O’Brien noted that, “even without energy rebates, electricity prices were up 5 per cent, a massive amount in just a single quarter”.

“Under Labor, gas and electricity bills are up almost 40 per cent as the short-term sugar hit of energy rebates has fallen away, leaving households permanently worse off,” Mr O’Brien said.

The closely watched core, or underlying, inflation measure hit an annual rate of 3 per cent – the first increase in almost three years. The one-percentage-point rise in the quarter far exceeded the RBA’s recent forecasts of 0.6 points.

The inflation reading pushed financial markets to lower further the chances of another interest rate cut. A Melbourne Cup rate cut decision had a 40 per cent chance before the inflation data; that now sits at just 8 per cent.

HSBC chief economist Paul Bloxham ruled out any further rate cuts to the three already delivered this year and expects the next big move by the Reserve Bank will be a rate hike in 2027.

“Interest rate cuts are off the table,” Mr Bloxham said. “The problem is that productivity is so weak that supply is constrained. So as input costs such as labour and energy rise there is no equal increase in output.”

HSBC had expected a 0.25 percentage point rate cut in both the December quarter of 2025 and the first quarter of 2026. But that has now changed to no cuts in either.

“We continue to see hikes in 2027, but we now expect them to begin in the first half of 2027,” Mr Bloxham said.

UBS economist George Tharenou said the underlying inflation rate would overshoot the RBA’s target range and possibly prevent a further rate cut. “UBS now see RBA on hold in November and (the latest reading) limits ability to cut again,” Mr Tharenou said in a note to clients.

CBA economists have also dropped their call for an RBA rate cut in February and said the bank could be on hold for an extended period of time.

“Given the material upside surprise to the September quarter CPI, and the broadbased nature of pricing pressures, we now expect the RBA to remain on hold from here,” said CBA economist Belinda Allen.

“Previously we expected one last rate cut in February 2026 to bring the cash rate back closer to neutral. We expect the RBA to pivot to a much more hawkish tone at the November Board meeting.”

Former RBA official Jonathan Kearns said there could be another rate cut but not until May next year.

He warned that low productivity would further erode chances of bringing inflation within target range and the RBA was clearly blindsided by the size of the inflation increase.

“The governor was asked the other night what would be a significant miss; this is undoubtedly a very big miss,” Mr Kearns said. “The path for inflation returning to the RBA’s target of 2.5 per cent was never going to be smooth, but this is a big bump.”

The jump in headline inflation to 3.2 per cent from 2.1 per cent in the June quarter was driven by a 9 per cent increase in electricity costs in the quarter as energy retailers hiked prices in the financial year.