What Australia's shocking inflation print means for ASX 200 investors and interest rates

The RBA is facing an uphill inflation battle. Will the bank's next move be to raise interest rates?

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Key points
  • The ASX 200 Index increased by 0.4% today, following a 0.8% rise on Wednesday, largely driven by expectations of a US Federal Reserve rate cut despite Australian inflation concerns.
  • Yesterday's ABS inflation data showed a 3.8% annual CPI increase and a 3.3% trimmed mean inflation, raising doubts about potential rate cuts from the Reserve Bank of Australia.
  • Analysts now suggest the RBA may need to tighten monetary policy, with predictions from Barrenjoey and UBS indicating possible rate hikes instead of cuts in 2026.

The S&P/ASX 200 Index (ASX: XJO) is up 0.4% in early afternoon trade today.

This comes after the benchmark Aussie stock market index closed up 0.8% on Wednesday.

That two-day boost looks to be aligned to growing expectations of a December interest rate cut from the US Federal Reserve rather than any hopes for rate relief from the Reserve Bank of Australia.

Hopes that were further dashed by yesterday's shock inflation data.

Surprised man looking at store receipt after shopping, symbolising inflation.

Image source: Getty Images

What's happening with inflation Down Under?

ASX 200 investors appeared to largely shrug off yesterday's shock inflation print. Whether that carefree attitude can be maintained remains to be seen.

The ABS reported that for the 12 months to October, the consumer price index (CPI) increased by 3.8%. That's up from the already elevated 3.6% print in September and ushered in the fourth month in a row of price gains.

This was the first time the ABS transitioned from the quarterly CPI to the complete monthly CPI as Australia's primary measure of headline inflation.

And crucially for ASX 200 investors pining for another RBA interest rate cut, the central bank's preferred measure of trimmed mean inflation came in at 3.3%, up from 3.2% and above the bank's top target of 3%.

Indeed, this is the highest trimmed mean inflation print we've seen since May.

What can ASX 200 investors expect from interest rates now?

The odds of a December RBA rate cut were already close to nil before Wednesday's unwelcome inflation surprise.

And with inflation potentially continuing to run above the central bank's target range, rather than seeing rate cuts pushed further out into 2026, ASX 200 investors and mortgage holders could now be facing rate increases instead.

"The RBA's November outlook already anticipated a slow journey back to the 2% to 3% inflation target," Farhan Badami, market analyst at eToro said.

He noted that yesterday's data "extends the timeline to recover even further, especially given stubborn non-tradable pressures like rents and the fading effect of Rent Assistance".

According to Badami:

This pretty much confirms the RBA's easing cycle might be over before it really started, potentially locking in [the] cash rate through mid-2026 at least. If inflation doesn't get any better, it could even add pressure on the RBA to increase rates.

And Badami is not alone in cautioning ASX 200 investors to position themselves for potentially higher interest rates in 2026.

Both Barrenjoey and UBS now forecast that rather than easing, the RBA will be forced to tighten monetary policy in the year ahead.

"The next RBA move is more likely to be a hike than a cut," Andrew Lilley, chief rate strategist at Barrenjoey, said (quoted by The Australian Financial Review).

"There is now more of a trend of higher inflation, which is becoming concerning," George Tharenou, chief economist for Australia at UBS, added.

Motley Fool contributor Bernd Struben has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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