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Australia is entering 2026 with inflation remaining above the RBA’s 2-3% range —sitting at 3.4% in November 2025. This is a fall from the near-term peak of 3.8%, which is welcome news but remains uncomfortably high. The level has many people wondering what’s driving it and what it may mean for interest rates. For First Nations people, it can affect how you plan for homeownership. To find out more, and how IBA can potentially help, keep reading!
To make sense of the moment, it helps to understand the two key drivers of price rises: cost‑push inflation and demand‑pull inflation.
Cost‑push inflation happens when it becomes more expensive to produce or supply goods and services. That can be due to:
Global supply chain disruptions
Natural disasters
Higher energy or transport costs
International commodity shortages
Australia felt this strongly after COVID‑19. As countries reopened at the same time, supply chains struggled to keep up. Goods became harder to source, and prices rose worldwide. Because Australia relies heavily on imports, these global pressures flowed directly into our domestic inflation.
For a while, our inflation moved closely with the US — just with a six‑month delay — showing how much of our price growth was imported rather than home‑grown (Chart 1).
Federal and State government electricity rebates later pushed inflation down sharply, but that was a temporary effect. Once those rebates wound back in 2025, underlying cost pressures became visible again.
Interestingly, even though electricity continued to grow – by a whopping 19.7% in the 12 months to November, it was lower than the mammoth 37.1% increase in the 12 months to October – reflecting the end of electricity subsidies. Electricity prices feed into virtually everything we buy. Because of the fall in electricity price growth (although still growing), inflation overall is lower.
Chart 1: Australian inflation and US inflation with a 6-month lag, Nov 2018- Nov 2025
Demand‑pull inflation is different. It happens when demand for goods and services grows faster than supply can keep up.
We’re now seeing early signs of this in Australia:
Domestic final demand rose 1.1% in the Sept quarter — strongest in over a year
The labour market remains tight, supporting income growth
Consumer sentiment has improved from the lows of 2023–24
Some have argued that demand‑pull pressures may have more of an impact on rising inflation recently, resulting in inflation reaching 3.8% in October 2025, before tempering.
Critically though, the extra spending isn’t on luxuries. It’s on essentials — electricity, rent, insurance, food, health. These are things households can’t easily cut back on, even when budgets are tight. That has implications for policy makers.
Monetary policy works best when inflation is driven by discretionary spending, so for things that we can do without, like luxuries, which grow in price through demand. But discretionary spending in Australia is still weak. Most of the price increases are in unavoidable categories. Further, the recent tempering in inflation, particularly driven by a cost factor like electricity, is a welcome sign.
That’s why several economists expect the RBA to hold rates steady through 2026, even though markets are currently pricing in at least one rate rise if not two. The next inflation reading on 28 January 2026 will be important for the RBA’s cash rate policy decision in February, as will wages and consumer sentiment data.
Sometimes, even a hawkish tone from the RBA — signaling that rate rises are possible — can further cool demand without any actual change to the cash rate.
For First Nations families thinking about homeownership, stability matters — especially when the broader market is uncertain.
IBA home loans continue to offer:
Low commencing rates (starting at 2.54% for the first 24 months)
Predictable increases of only 0.25% per year after that
A long pathway — around 14 years — before reaching the full variable rate
Highly achievable deposits ($1,500–$9,000 depending on income)
This structure provides breathing room during a period when commercial rates may move more quickly in response to inflation data.
Moving forward with confidence
Inflation remains above the RBA’s target range, but understanding why it’s rising helps us navigate what comes next. Whether you’re planning for homeownership, budgeting for your family, growing a business, or leading in your community, understanding what is driving inflation gives you a stronger foundation to make informed decisions.
