Buying ASX shares and worried about the potential market impacts of rising inflation?
You're not alone.
On Wednesday, investors were greeted with some unwelcome news from the Australian Bureau of Statistics (ABS).
Specifically, the ABS revealed that for the 12 months to October, the consumer price index (CPI) was up by 3.8%, rising from the 3.6% 12-month inflation print in September. And trimmed mean inflation, the measure most relied on by the Reserve Bank of Australia, increased to 3.3% from 3.2%.
That news didn't keep investors from buying ASX shares, though, with the S&P/ASX 200 Index (ASX: XJO) closing up 0.8% on the day.
But with the inflation genie back out of the bottle, the odds of any near-term interest rate cuts from the RBA have all but evaporated. And the chances Aussies will see a rate hike in 2026 have soared.
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Will the RBA now raise interest rates in 2026?
Trent Saunders, Commonwealth Bank of Australia (ASX: CBA) senior economist, noted investors buying ASX shares should not expect interest rate relief any time soon.
According to Saunders:
This outcome reinforces our view that interest rates will stay on hold for an extended period. Signs of a pick-up in market services will be of particular concern for the RBA, but the signal from this release is still far from clear.
CBA noted:
The Reserve Bank meets in December and is expected to keep rates steady. But with inflation proving sticky, the tone could turn more towards interest rate hikes, especially if services inflation persists.
Farhan Badami, market analyst at eToro, added:
This pretty much confirms the RBA's easing cycle might be over before it really started, potentially locking in 3.60% 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.
As for higher rates, UBS and Barrenjoey both said they now expect the RBA will hike interest rates once or twice in the year ahead.
Buying ASX shares in a higher interest rate environment
The jury is still out. But following the fourth consecutive month of rising inflation, investors buying ASX shares would do well to review their current and planned shareholdings today.
While all companies come with their own unique risk and reward profiles, some market sectors tend to perform better than others when borrowing costs increase.
As a general rule, ASX value shares often outperform ASX growth shares during periods of monetary tightening.
So you may want to consider increasing your exposure to consumer staples like Coles Group Ltd (ASX: COL) and Woolworths Group Ltd (ASX: WOW) shares and decreasing exposure to ASX consumer discretionary shares.
A lot of ASX tech stocks – often priced with future earnings in mind – could also come under pressure if the RBA raises interest rates in 2026 as higher rates increase the present cost of investing in those future earnings.
The recently rebounding ASX property stocks could also take a hit under this scenario.
ASX banks stocks, on the other hand, could benefit, as higher rates enable them to improve their net interest margins, so long as the wider economy keeps chugging along.
These are just a few broad investment themes to keep in mind when you're buying ASX shares in today's environment.
