RBA revises inflation outlook higher after unexpected pick-up
Michael Plumb, Head of Economic Analysis at the Reserve Bank of Australia, discussed the unexpected pick-up in inflation and the revised economic outlook at the 2026 ABE Annual Forecasting Conference. He noted that stronger demand and sector-specific pressures led to increased inflation forecasts.
Inflation surprises with significant pick-up
Michael Plumb, Head of Economic Analysis at the Reserve Bank of Australia, highlighted a material and unexpected pick-up in inflation during the second half of 2025. Headline inflation reached 3.6 percent and underlying (trimmed mean) inflation was 3.4 percent in the year to the December quarter.
This contrasted with earlier expectations from mid-2025, which projected underlying inflation to ease further to around 2.7 percent by the June quarter 2025, bringing the economy closer to the RBA's 2–3 percent target range.
The RBA's February forecasts now assume a higher path for the cash rate, consistent with financial market pricing, and have revised inflation forecasts higher for the coming year.
This adjustment reflects both sector-specific price pressures and stronger-than-expected overall demand, contributing to economy-wide capacity pressures.
Demand resilience and supply constraints
The unexpected inflation surge was driven by sector-specific pressures in travel, fuel, housing, and retail, alongside stronger-than-anticipated aggregate demand.
This demand resilience stemmed from a more robust global economy, less restrictive domestic financial conditions, and higher real household incomes and wealth.
Business investment, particularly in data centres, also saw an unanticipated pick-up.
The RBA concurrently revised its estimate of the economy's supply capacity slightly lower, intensifying overall capacity constraints.