Inflation woes to cast shadow over next federal budget

Andrew Brown | February 26, 2026

Stubborn high inflation is set to impact the upcoming federal budget, with the treasurer warning belt-tightening of the nation’s finances is coming.

Data has revealed underlying inflation rose to 3.4 per cent in January, giving the Reserve Bank more reason to lift interest rates.

While headline inflation remained steady at 3.8 per cent to start the year, the central bank looks more closely at the underlying figure when it sets rates.

Treasurer Jim Chalmers said the federal budget would be handed down in May amid higher-than-expected inflation, which would lead to clawed-back spending.

“There’ll be belt tightening in the budget, we’ve made that really clear, and there has been belt tightening in the first four budgets,” Dr Chalmers told ABC News.

“Every budget is delivered in the context of the economic conditions. 

“And the economic conditions right now are defined by inflation, which is higher than we’d like, for longer than we would like.”

While the Reserve Bank is expected to keep rates on hold after hiking them to 3.85 per cent in February, the inflation figures reinforce a further rise is on the cards.

Capital expenditure data for the final quarter of 2025 will be released on Thursday, offering more insight into the economy.

Economists have tipped a drop in the rate for the December quarter as a previous spike in data centre equipment eases.

Westpac chief economist Luci Ellis said a fall of 0.5 per cent was predicted for the quarter.

“Weaker capital goods imports through the quarter, alongside a slowdown in short‑term expected capex growth, point to a decline in capex growth,” she said.

“We will be closely monitoring whether the investment pipeline is sustained across key sectors.”

The most recent figures showed capital expenditure growing 6.4 per cent in the September quarter, driven by data centre growth and investment in air transport.

It was the largest quarterly increase since March 2021.