Underlying inflation nudged higher in January and headline CPI stayed stuck at 3.8%. Oliver Hume’s Matt Bell explains why at least one more rate hike could be coming for businesses.
What’s happening: The Australian Bureau of Statistics has released its monthly Consumer Price Index for January 2026, showing headline inflation unchanged at 3.8% year-on-year.
Why this matters: With underlying inflation moving in the wrong direction and the RBA having already raised rates in February, the risk of further hikes is real, and the customers small businesses depend on are feeling it.
Australia’s latest inflation figures have done little to ease the pressure on small business owners, with the January 2026 Consumer Price Index confirming that price growth remains stubbornly above the Reserve Bank’s target band and that more monetary tightening could still be ahead.
The Australian Bureau of Statistics (ABS) data, released on 25 February 2026, showed the CPI rose 3.8% in the 12 months to January, unchanged from December. Michelle Marquardt, ABS head of prices statistics, noted that trimmed mean inflation, which strips out volatile price movements and is the RBA’s preferred guide to underlying conditions, rose from 3.3% to 3.4% over the same period.
Matt Bell, Chief Economist at Oliver Hume, said the RBA would take a measured view of the result. “The RBA will look at the figures with some satisfaction that it confirmed the February rate hike was clearly the right decision, but also worried that there were no real signs of any improvement toward its target band.”
On what comes next, Bell was direct. “The lack of any real improvement in inflation and an ongoing tight labour market probably locks in at least one more rate hike in the first half, and if there is no improvement soon in the inflation pulse, there could be more to come.”
Electricity and housing drive the rise
The January CPI data made clear where the pressure is being felt most. Housing was the largest contributor to annual inflation, rising 6.8% in the 12 months to January, up from 5.5% in December. Within that, electricity costs surged 32.2% year-on-year, a jump the ABS attributed largely to households exhausting both the Commonwealth Energy Bill Relief Fund rebates and various state government rebates.
Marquardt noted that excluding the impact of those government rebates across the previous year, electricity prices rose 4.5%, reflecting the annual price reviews by energy retailers that came into effect in July 2025. For small business operators paying commercial electricity rates, the underlying upward pressure on energy costs is a more direct concern than the rebate-inflated headline figure.
Rents continued to add to the housing burden, contributing to a category that remains the single biggest driver of inflation in the current cycle. As Dynamic Business reported in November 2025, persistent services inflation and re-accelerating housing costs had already made rate relief look distant, with analysts warning at that point that the shallow easing cycle might already be over.
Food and non-alcoholic beverages inflation eased slightly to 3.1% from 3.4% in December, though prices for meals out and takeaway remained elevated at 3.9%, driven by wages and ingredient costs. For operators in hospitality, that dynamic, rising input costs alongside cautious consumer spending, continues to compress margins.
Recreation and culture inflation also eased, falling from 4.4% to 3.7%, with domestic holiday travel and accommodation moderating from a 9.6% annual rise in December to 5.6% in January.
While small businesses brace for the downstream effects of inflation on customer spending, Bell noted that property markets are likely to absorb the data without significant disruption. Auction clearance rates bounced back in January and February, house price growth has slowed marginally but remains positive, new home sales for January rose, and residential lending for the December quarter was strong.
Bell pointed out that the rate picture, though more complicated than it was six months ago, has not fundamentally reversed for borrowers. “For the moment, mortgage holders and potential purchasers are still 0.5% better off than the same time 12 months ago and will still be in a better position even with one more hike.”
That framing offers some context but limited comfort for small business owners whose customers are managing mortgage repayments, rent increases and electricity bills simultaneously. When household budgets tighten, discretionary spending is typically the first to soften, and it is often small businesses in retail, hospitality and services that absorb that pullback first.
What small businesses should expect
The January CPI data, taken alongside the February rate hike and the RBA’s stated concern about the persistence of inflation, paints a cautious picture for the months ahead. Bell’s assessment is that productivity constraints are contributing to the problem, with the economy already running up against capacity limits even at this early stage of the recovery cycle, and that risks re-igniting price pressures if demand picks up faster than the supply side can accommodate.
For small business owners, the practical implications are clear enough. Consumer confidence is unlikely to strengthen materially while rate uncertainty persists. Cost pressures from energy and labour remain elevated. And the prospect of another rate decision before mid-year means the operating environment is unlikely to stabilise quickly.
The best position for owners to be in, according to the data and those analysing it, is one of clear visibility over cash flow, lean cost structures, and realistic expectations about customer spending through at least the first half of 2026. Whether the RBA moves once more or more than once, the window for easy growth conditions appears to have closed, for now.
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