Australia’s inflation rate has held at 3.8% year-on-year, defying expectations of a modest easing and reinforcing fears of another interest rate rise as early as May – a troubling sign for retailers already battling cautious consumers.

New data from the Australian Bureau of Statistics shows headline CPI remained steady in January, while the Reserve Bank’s preferred trimmed mean measure of underlying inflation edged up to 3.4%, still well above the central bank’s 2–3% target band.

Markets were pricing in a strong chance of another rate hike even before the figures landed. The hotter-than-expected core reading is unlikely to ease that pressure.

For retailers the implications are clear: higher-for-longer interest rates risk further dampening discretionary spending just as trading conditions show signs of fragility.

Housing costs rose 6.8% over the year, with electricity prices surging 32.2% following the roll-off of government rebates. Food and non-alcoholic beverages climbed 3.1%, while recreation and culture rose 3.7%, underscoring persistent cost pressures across household budgets.

The RBA lifted the cash rate to 3.85% earlier this month after a rebound in economic activity and stubborn inflation through late 2025. With unemployment still low at 4.1%, policymakers remain concerned about underlying price momentum.

The inflation data lands as the Albanese government prepares its May budget. Treasurer Jim Chalmers and Finance Minister Katy Gallagher have signalled a renewed focus on fiscal restraint amid rising defence, healthcare and aged care costs.

The RBA has previously pointed to government spending as a contributing factor to inflationary pressures, increasing scrutiny on the budget’s settings.