Ayan Tripathi
Inflation rises out of control, raising concerns of a rate hike as early as 2026
Inflation has picked up again, and not gently. The ABS revealed that headline inflation rose to 3.8%, marking the fastest increase since April 2024, while exceeding economists’ expectations of 3.6%. Underlying inflation also rose to 3.3%, nudging past the RBA’s projection of 3.2%. Put simply, prices are running faster than forecasters and the RBA had hoped.
The pickup in inflation was primarily driven by a 37.1% increase in electricity prices over the past 12 months, largely because of the cessation of government electricity subsidies, which had previously suppressed costs. These rebates partly hedged against the knock-on effects of sanctions on Russian gas following Russia's invasion of Ukraine. Gas prices, which feed into electricity generation and tend to be the priciest input, rose from $107.66 in February 2022 to $143.47 in October 2025. Without the rebates, household electricity bills would have followed gas prices, and headline inflation would look even worse.
Other contributors to this uptick in inflation includes a 5.9% increase in housing inflation, a 16.4% jump in non-alcoholic beverage prices and a 12.4% spike in accessory prices, as higher gold and silver prices were passed onto consumers. However, Shadow Treasurer Ted O’Brien pins the resurgence on what he calls Chalmers’ “spending spree”, as federal spending as a share of the economy is the highest since the 1980s, excluding the pandemic.
Recent inflation data isn’t good news for mortgage holders as Cherrelle Murphy, chief economist at EY, believes that “interest rate hikes are more than likely in 2026”, which likely bolsters mortgage repayments and further enhances cost-of-living pressures on households.
How can this analysis be applied to HSC Economics?
Students can apply the analysis above to show the causes and effects of inflation on the Australian economy, a common short answer and essay question. In doing so, students must understand the differences between headline and underlying inflation, as the analysis above reveals that recent inflation trends are driven by both one-off factors, like the wind-up of electricity rebates and structural factors, such as Government spending.
Also, the analysis above can be utilised to evaluate the effectiveness and limitations of macroeconomic policies in achieving economic objectives, specifically fiscal policy through the electricity rebates in achieving price stability. Similarly, students can apply the analysis above to reveal how recent inflation trends can impact macroeconomic policy stances, like monetary policy and the subsequent impact on Australian stakeholders, like individuals and firms.
APRA imposes debt-to-income limits on home loans for the first time since 2017
The APRA has stepped into the financial markets for the first time since 2017. From 1 February, no more than 20% of new mortgage lending can have a debt-to-income ratio of six or more. The 20% cap applies separately to investor loans and owner-occupier loans. A small, but deliberate choice to prevent investors from “crowding out” prospective owner-occupiers.
APRA chair John Lonsdale notes that the move is pre-emptive to the risks generated by the booming housing market as “Rising indebtedness has…been associated with an increase in riskier lending and rapid growth in property prices”. The roots of this are familiar, with lenders competing for market share as interest rates have fallen, loosening lending standards in the process. The Government’s expanded 5% Deposit Scheme has also pulled more buyers into the market, adding fire to a competitive landscape.
Currently, around 6% of new mortgages sit at or above the debt-to-income threshold of six. Across banks, the share of new lending to investors with a high-debt-to-income ratio has jumped from 8% to 10% over the year to the September quarter 2025. And this trend is expected to remain persistent according to the APRA.
Eliza Owen, head of research at Cotality, is largely supportive. She claims that the cap is “a good move in an environment where investor concentration in the market was unusually high and back to levels seen in the 2010s”. Without intervention, there could be a “blow-out in high debt-to-income lending”, a dynamic that pushes asset prices up, pulls homeownership further out of reach and skews wealth towards high-income groups.
How can this analysis be applied to HSC Economics?
Students can apply the analysis above to explain the impact of government economic policies on economic objectives, a common short answer and essay question. Likewise, students can show how the absence of government intervention can adversely impact economic objectives like the distribution of income and wealth.
For this, students will need to display an understanding of the different dimensions within the distribution of income and wealth, like age. With the above analysis, for instance, students can show how minimal government intervention can concentrate a high proportion of income and wealth towards older age groups because of their long-term earnings accumulation. This allows them to take out investment home loans and further grow their wealth, at the expense of younger individuals who are less able to access wealth-generating assets as asset prices rise.
Australian households spend twice as much of their income on mortgages than five years ago
Today, Australian households are devoting twice as much of their income to mortgage repayments as they did five years ago, according to recent Cotality research, showcasing the sharp deterioration in Australian housing affordability.
Servicing a new mortgage now consumes 45% of a median household’s pre-tax income, up from 26% in September 2020. Also, saving up for a standard 20% home deposit now takes almost 12 years nationally, and with the share of income needed for loan repayments doubling in five years, many buyers have pivoted to units instead. Even then, unit prices have climbed 27.1%, so households are not that much better off.
The pandemic-era surge in home values is well-documented, but the scale of increase is eye-catching. Australian home values rose by roughly 50% since COVID began, according to Eliza Owen, head of research at Cotality. The drivers were discretionary: “monetary stimulus and record-low interest rates that supercharged borrowing capacity and demand”, all while housing supply lagged. Despite the pain, prices are expected to rise further thanks to favourable demand-side policies such as the recently adjusted First Home Buyer scheme.
Meanwhile, incomes have struggled to keep up. Median pre-tax household income has grown 20% to $104,390 since September 2020, a modest increase compared to the 54% spike in the median dwelling value, now $860,529. Unsurprisingly, voters have noticed. According to Essential Polling, affordable housing is one of the top three issues for 49% of Australians, and for 56% of those aged 18 to 34. That places housing affordability as the nation’s second-highest concern overall, just behind the cost of living.
How can this analysis be applied to HSC Economics?
This analysis can be utilised to evaluate the impact of macroeconomic and microeconomic policies on the Australian economy. For this, students will not only be required to draw upon their understanding of specific fiscal initiatives within macroeconomic policy, like the First Home Buyer scheme, but also their understanding of microeconomic policies and their impact on Australian stakeholders, like individuals.
Here, students could display how a recent over-reliance on macroeconomic policies relative to microeconomic policies has curbed supply growth in assets like housing, effectively raising their price and hence limiting the ability of some individuals to access such assets.