Keep calm and carry on: The risks associated with misreading the inflation mirage

At times like these, a little composure goes a long way. With markets jittery over recent inflation prints and the RBA shifting its tone, advisers face a familiar challenge: how to interpret the noise without passing that anxiety on to clients. Reacting too strongly to short-term data risks undermining long-term outcomes. That’s the quiet warning embedded in the latest macro insights from Yarra Capital Management’s Tim Toohey, who argues that recent inflation fears have been misread, and that monetary policy may now be shadowboxing with the wrong risks.

Toohey’s central thesis is this: the so-called September and October inflation ‘shocks’ were driven largely by the cycling of electricity subsidies in different states, rather than any real, economy-wide pickup in pricing pressure. Once those subsidies return in the December quarter, much of the spike will unwind. Toohey’s call is that this is not the beginning of an inflation re-acceleration, but a fleeting aberration.

This misunderstanding matters deeply. Financial markets, commentators and policymakers have quickly abandoned the case for rate cuts and begun entertaining the prospect of renewed hikes. But Toohey holds firm, cuts are still likely in 2026, starting from May. This is not contrarianism for its own sake, it is grounded in the sequential data. Since May, monthly inflation has averaged just 0.2 per cent, well within the RBA’s target zone.

RBA anxiety and its effects on mortgages and markets

In moments of misread inflation data, central banks often revert to instinct, and the RBA appears no different. A spooked board has shifted tone, referencing housing and sticky services inflation as causes for concern. But Toohey urges caution, the CPI components driving recent figures, like tobacco, electricity and jewellery, are either mismeasured, volatile or non-core.

This nervousness has direct effects on sentiment. Advisers are seeing the psychological toll on mortgage holders and households who are still recovering from the last rate hike cycle. Electricity use has plummeted 12 per cent over two years, hardly a sign of overheated demand. For advisers, Toohey’s analysis is an invitation to push back on fear-driven decisions. Mortgage stress is real, but this is not the time for clients to aggressively de-risk portfolios or panic into term deposits.

Housing, rents and real estate realities

The RBA has cited housing-related inflation as a key worry. But Toohey clarifies that this is not about surging property demand. Instead, it’s about the expiry of deep discounts developers used in the sluggish 2023–2024 market. This is price normalisation, not escalation.

Rents, by contrast, deserve more attention. Advertised rents are rising, and CPI measures will likely catch up in 2026. But the policy response here is delicate. Raising interest rates into a housing undersupply is, as Toohey puts it, a “self-defeating” policy. Advisers working with property-exposed clients should differentiate between these two drivers, one is noise, the other is persistent.

The distortions driving CPI

Toohey’s dissection of recent CPI data includes some masterful microeconomic sleuthing. Tobacco inflation is overstated, due to the growing share of illicit sales not captured in official figures. Jewellery has surged because of spiking gold prices, possibly linked to US political instability and fears about institutional trust. Meat prices are up due to restocking after a dry spell, while clothing inflation is contradicted by import price data.

All of this reinforces a crucial point: advisers must not take headline inflation at face value. It is being contorted by one-offs, base effects, and statistical blind spots. For clients, this may justify remaining allocated to risk assets or fixed income rather than retreating too hastily. The economic reality is less dramatic than the optics.

Global anchors: Why international dynamics matter

Toohey’s outlook is notably global in scope. He expects at least 100 basis points of easing from the US Federal Reserve in 2026, under a likely Trump-aligned, dovish Fed chair. That dovishness, coupled with a softer US dollar, will likely see capital flow away from the US and toward more attractively valued international markets.

In that environment, the Australian dollar may appreciate meaningfully. Toohey notes that the RBA is increasingly focused on the exchange rate channel of monetary policy. A stronger dollar, if left unchecked, would tighten financial conditions. The most likely RBA response? Easing, not hiking. For advisers, this raises the case for global diversification and supports risk-on positioning into mid-2026.

Sentiment, mispricing and the adviser’s Role

There is also a gently scathing nod towards the financial media and market commentators who extrapolate too much from too little. A few bad prints do not mark the start of a new inflation regime. The CPI distribution charts he includes show that roughly 40 per cent of the consumer basket remains below the bottom of the RBA’s target band.

The job of advisers is not merely to interpret markets but to anchor clients in data-informed realism. Toohey’s insistence on looking at three- and six-month annualised inflation rates, which are currently well-behaved, is a method advisers can adopt themselves. In periods of economic noise, clarity is a form of capital.

Asset allocation in a world of optical illusions

The implications for portfolio construction are subtle but significant. Advisers who react too aggressively to short-term inflation data may de-risk unnecessarily. Toohey makes a compelling case for selective exposure to growth assets, international equities, and duration in fixed income. Cash may feel comforting now, but opportunity costs are rising.

His outlook does not imply exuberance. This is not a market on the cusp of explosive growth. But it is one where structural inflation risks are overstated, and where the path of monetary easing remains open. For clients with long time horizons, it may be time to tilt portfolios gently back toward quality growth.

Patience and the path to May 2026

Toohey’s final forecast is specific: cuts beginning in May 2026, with further easing in August and November. It is a view built on careful observation, not just of local inflation dynamics, but of productivity trends, labour market data and global rate differentials.

The period between now and then will be noisy. Inflation will stay elevated for a few months due to base effects and rebate reversals. But by the middle of 2026, the distortions will fade, the path will clear, and the RBA will likely shift. The case for risk is not overwhelming, but it is building quietly beneath the surface. Advisers who follow Toohey’s lead will be ready when the market catches up.

Laurence Parker-Brown

Laurence Parker-Brown is head of content at The Inside Network and managing editor of The Inside Adviser and Investor Strategy News.