Inflation rise dampens hopes for interest rate cuts as employment dynamics shift

By Newsdesk

January 28 2026
Share

In a development that has dashed hopes for an interest rate cut, Australia's Consumer Price Index (CPI) has surged back to 3.8%, erasing the progress made since October. This unexpected rise in inflation has set the stage for the Reserve Bank of Australia's (RBA) meeting next Tuesday, where the likelihood of a rate cut now seems improbable.

Inflation rise dampens hopes for interest rate cuts as employment dynamics shift

"A lift in CPI is what many economists predicted, but to see us back up to 3.8% is disappointing—we’ve lost all progress since October," remarked Ben Thompson, CEO and co-founder of Employment Hero. He added, "With the RBA meeting next Tuesday, this inflation lift all but takes an interest rate cut off the table."

The rise in inflation comes at a time when Australia's labour market is experiencing a paradoxical situation. On paper, wages have increased by 5.3% year-on-year. However, the reality for many workers is less rosy, as employers are reducing hours to cope with the rising costs. "In practice, employers are handing out fewer hours to go with those higher rates," Thompson explained. "Our December Jobs Report shows average hours worked down 1.5% in a single month, meaning many workers are taking home less despite the headline wage growth."

This trend highlights a hidden cost of persistent inflation, where businesses are not necessarily reducing their workforce but are instead rationing work hours. "Businesses aren't cutting jobs outright; they're rationing work," Thompson noted. The report further reveals that while casual headcount has increased, casual hours have fallen by 6% year-on-year. This indicates that more people are employed, but they are competing for a shrinking pool of shifts.

The current economic environment has placed significant pressure on employers, who have already been grappling with higher wages, energy costs, and compliance burdens over the past two years. The upcoming implementation of Payday Super later this year is adding another layer of financial strain. "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," Thompson stated. He warned that "another rate hold, or worse, keeps the pressure valve sealed."

The December data from Employment Hero paints a stark picture of the choices employers are making in response to these challenges. "The December data tells us employers have already made their bet: they're trading hours for headcount, permanence for flexibility, growth for survival," Thompson explained. This strategy is having a pronounced impact on young Australians, who are experiencing a significant reduction in work hours. "Young Australians are feeling it most acutely, with hours down over 6% and wages falling 2% in what should have been their busiest month," he said.

The situation presents a complex challenge for policymakers and businesses alike. As the RBA prepares for its upcoming meeting, the interplay between inflation, interest rates, and employment dynamics will be under intense scrutiny. The hope is that a balanced approach can be found to address the pressures facing both employers and workers in this evolving economic landscape.

sections

most read

sections

most read

sections

most read

sections

most read

sections

most read

sections

most read

sections

most read

Most read

Age Pension increase prompts Australians to review their finances

Latest Podcast

Rest strengthens investment strategy with seasoned executive appointment

Resources

There is $17.5 billion in lost and unclaimed super across ...

Invest