It’s not just the temperature increasing in Australia – inflation also is hot, with the Consumer Price Index rising by 3.8 per cent year-on-year in December 2025, up from 3.4 per cent in the year to November.

The figures landed well above the Reserve Bank of Australia’s 2–3 per cent target range, while the increase was larger than forecast, catching markets by surprise. The immediate fallout is a sharp shift in monetary policy expectations. With the RBA scheduled to meet next Tuesday, the 3.8 per cent figure makes an interest rate cut highly unlikely and puts further hikes back on the table.

“A lift in CPI is what many economists predicted, but to see us back up to 3.8 per cent is disappointing – we’ve lost all progress since October,” says Employment Hero CEO Ben Thompson.

Broad-based Pressures Are Driving The Spike

The largest contributor to annual inflation in December was housing, surging 5.5 per cent, reflecting stronger rents and rising electricity costs. This was followed by food and non-alcoholic beverages, up 3.4 per cent, and recreation and culture, which rose 4.4 per cent, showing that both essential and discretionary spending categories are driving price pressures across the economy. 

Services inflation also remains sticky, particularly in areas such as healthcare, education, and professional services, highlighting that underlying price growth is proving difficult to dislodge. These pressures sit alongside ongoing economic heat, with the latest NAB Monthly Business Survey recording capacity utilisation at 83.2 per cent, indicating that firms across most industries are operating near full stretch. The combination of sustained price rises and high utilisation give the RBA limited room to ease policy, making further interest rate interventions increasingly likely.

The Labour Market Has People Working Less For More

While inflation rises, the labour market is showing signs of a structural shift. Exclusive Employment Hero data, from 300,000 Australian SMEs, recorded headline wage growth of 5.3 per cent year-on-year in December, but the increase was being offset by a reduction in total hours on the job.

“In practice, employers are handing out fewer hours to go with those higher wages,” says Thompson. “Our December Jobs Report shows average hours worked down 1.5 per cent in a single month, meaning many workers are taking home less despite the headline wage growth.  This is the hidden cost of persistent inflation. Businesses aren’t cutting jobs outright; they’re rationing work.”

The trend is most stark in hours for casuals and young workers, each group working 6 per cent fewer hours year-on-year, even as casual employment climbed. Says Thompson: “The December data tells us employers have already made their bet: they’re trading hours for headcount, permanence for flexibility, growth for survival.”

Business Confidence Is Up But For How Long?

Despite the inflationary headwind, business conditions remain surprisingly firm. The December NAB Monthly Business Survey showed business conditions up 2 points to +9, while business confidence rose 1 point to 3.

Conditions improved across seven of the eight major industries, with all states reporting positive trend confidence. But the survey also revealed business costs continued to rise, with purchase costs up 1.4 per cent and labour costs up 1.8 per cent in quarterly terms.

Australian Industry Group CEO Innes Willox said high inflation posed a serious threat to businesses and should serve as a warning to authorities.

“The experience of 2022 and 2023, which saw real wages fall and business costs explode, cannot be allowed to happen again in 2026,” he declared. “The federal government needs to take the threat of rising inflation seriously in the forthcoming budget. Soaring federal spending, which will rise to 26.9 per cent of GDP this financial year, its highest level since the mid-1980s, is a major driver of both inflation and deteriorating budget sustainability.”

SMEs Will Watch The Reserve Bank With Interest

Economists say the 3.8 per cent inflation rate has dashed hopes of an interest rate cut and increased the likelihood of an increase. For SME owners with loan repayments, the focus may shift from expansion to balance sheet preservation, especially in the second half of the year.“Employers have already spent two years absorbing higher wages, energy costs, and compliance burdens. Now they’re preparing balance sheets for Payday Super, which hits later this year,” says Ben Thompson. “Another rate hold, or worse, keeps the pressure valve sealed.”