Australia’s inflation fight just got tougher and small business and households are right in the firing line. The latest data from the Australian Bureau of Statistics (ABS) shows the Consumer Price Index (CPI) rose 3.8 per cent in the year to December 2025, up from 3.4 per cent in November.

That puts inflation well above the Reserve Bank of Australia’s (RBA) 2–3 per cent target band and ramps up pressure ahead of the RBA’s February meeting.

With businesses and households juggling rising rents, higher power bills and tight budgets, the timing couldn’t be worse.

What the latest CPI data tells us

According to the ABS, the largest contributor to annual inflation in December was Housing, which rose 5.5 per cent, followed by Food and non-alcoholic beverages (up 3.4 per cent) and Recreation and culture (up 4.4 per cent).

ABS head of prices statistics Michelle Marquardt said the inflation picture is moving in the wrong direction.

While headline inflation grabbed attention, economists and the RBA are also watching measures of underlying inflation. The trimmed mean, which strips out extreme price movements, rose over the year to December, another warning sign.

“Trimmed mean inflation was 3.3 per cent in the 12 months to December 2025,” Marquardt said.

That matters because it suggests inflation pressures are broad-based, not just a one-off spike.

Utility costs put the squeeze on

Dig a little deeper into the data, and you’ll understand why so many small businesses feel like costs won’t stop climbing.

Annual goods inflation rose to 3.4 per cent, driven largely by electricity prices, which jumped a massive 21.5 per cent over the year. Services inflation climbed even higher, hitting 4.1 per cent, with domestic travel and accommodation up 9.6 per cent and rents rising 3.9 per cent.

Electricity prices were a standout. Partly because state and federal rebates are now being used up.

The ABS noted that excluding the impact of government rebates, electricity prices still rose 4.6 per cent over the year, reflecting annual price reviews by energy retailers.

These increases flow directly through to overheads for any small business with a bricks-and-mortar store.

Grant Austin, CEO of pay.com.au, said CPI-linked costs are stripping businesses of their buffers.

“Housing is the single largest contributor to annual inflation (+5.5 per cent). For SMEs with a physical footprint, this translates directly into commercial rent hikes,” Austin said.

“As most commercial leases in Australia are CPI-indexed, this 3.8 per cent CPI increase triggers automatic overhead increases, effectively stripping businesses of their operational buffers.”

Food inflation bites cafés and retailers

Food prices continued to climb in December, with meat and seafood up 4.4 per cent, fruit and vegetables up 4.0 per cent, and meals out and takeaway rising 3.5 per cent over the year.

Beef and lamb prices jumped more than 10 per cent, driven by strong overseas demand, while weather-related shortages pushed up the price of staples like cucumbers, zucchini and capsicums.

For independent operators, there’s little protection from these swings.

“Independent small businesses often lack price protection contracts held by larger operators,” Austin confirmed.

“They’re buying essentials like milk, meat and coffee at volatile spot prices, while logistics volatility and fuel surcharges keep adding pressure.”

The result is a tough choice: absorb the costs and risk cash flow, or pass them on and risk losing customers.

The biggest monthly price spike came from Recreation and culture, with domestic holiday travel and accommodation rising 8.2 per cent in December alone as Australians travelled for Christmas, school holidays and major events like the Ashes.

International travel costs also jumped sharply, with airfares rising 24.4 per cent over the month.

Is a rate rise now locked in?

With inflation re-accelerating, many economists say the RBA may have little choice but to act.

CreditorWatch chief economist Ivan Colhoun said the latest CPI figures confirm inflation is persisting above target.

“The data suggests Australian inflation is persisting at an above target rate and doesn’t provide signs of or greater confidence that inflation will return to target as forecast with unchanged policy,” Colhoun said.

The quarterly trimmed mean rose 0.9 per cent, above the RBA’s forecast for the second quarter in a row, pushing annual underlying inflation to 3.4 per cent.

“It’s therefore not plausible that the RBA staff can forecast a return of inflation to target… without at least one to two interest rate rises, with the first likely to be delivered at Tuesday’s February Board Meeting,” Colhoun said.

Property economist Matt Bell from Oliver Hume went further, saying markets have already moved.

“With the trimmed mean measure coming in above market expectations… that 0.25 per cent rate hike is now pretty much locked in,” Bell said.

Roy Morgan data shows 24.5 per cent of mortgage holders were ‘ at risk’ of mortgage stress in December, the lowest level in three years. That’s largely thanks to rate cuts earlier in 2025 and a strong jobs market.

But that could quickly reverse if rates rise again.

Roy Morgan modelling suggests a 0.25 per cent rate hike in February would push the share of at-risk mortgage holders to 25.3 per cent, rising further to 27.2 per cent if rates climb again in March.

Roy Morgan CEO Michele Levine warned that inflation’s rebound has changed the outlook.

“Inflation has re-accelerated… and means the RBA is not likely to cut interest rates again and the most likely next move will be an increase,” Levine said.

That’s bad news for business owners who rely on discretionary spending. Stressed households spend less.

Small business caught in the middle

Back on the shop floor, Austin says the nation’s small business owners are being squeezed from both sides.

“Couple the increase with the upcoming surcharging ban in July, and it’s clear to see SMEs are caught between a rock and a hard place,” he said.

“Either absorb rising costs and risk insolvency, or raise base costs. For consumers, this translates into higher prices… fuelling the very inflation the RBA is trying to kill.”

With one in 10 hospitality businesses closing in FY25, resilience is becoming a survival skill.

“Resilience and out-of-the-box thinking will be key to survival in 2026,” Austin said.

Not everyone agrees that rates should rise

Not all voices support higher interest rates.

ACOSS Acting CEO Jacqui Phillips said further hikes would do more harm than good.

“Inflation figures do not justify further interest rate increases that would threaten thousands of jobs and increase financial stress,” Phillips said.

“Higher interest rates lead to increased unemployment and are too great a price to pay.”

ACOSS is calling for targeted measures to tackle costs at their source, including energy-efficiency investments and higher income support payments.

All eyes now turn to the RBA’s February meeting.

Whether the Reserve Bank holds or hikes, inflation is proving sticky, and the path back to the target band is likely to be slower than hoped.

That means small business owners need to start planning now for higher costs, tighter cash flow, and customers who are increasingly price-sensitive.

If rates do go up again, the pressure will ripple right through the economy.

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