Unpredictable inflation, metal prices, and the AI bubble risk: key trends to watch in the Australian economy in 2026
The Australian share market's 6.8% return in 2025 was a welcome respite in a turbulent year, marked by trade wars, rising inflation, and the looming specter of an AI-driven bubble. Here's a closer look at three critical trends to watch in the coming year.
- Sticky Inflation
Despite positive returns, the S&P/ASX 200 closed 2025 at 8714.3 points, down over 4% from its October peak. This decline coincided with a shift in inflation expectations. Traders initially anticipated further rate cuts, but now they're leaning towards hikes. Higher interest rates typically stifle stock performance by increasing business funding costs and curbing consumer spending.
Two major banks predict a rate hike at the Reserve Bank of Australia's early February meeting, with none forecasting additional cuts. This outlook partially explains the divergence between the ASX and Wall Street, where the latter benefited from a December rate cut and potential future reductions.
The AI boom in the US technology sector further contrasts with Australia's resource- and banking-focused market. Betashares' David Bassanese highlights a crucial question for the Australian economy: can inflation be controlled without stricter monetary policies and slower growth?
- Geopolitical Risks and AI Bubble
Analysts predict global and Australian equity markets will rise in 2026 despite geopolitical tensions, including Beijing-Taiwan clashes and the US oil blockade of Venezuela. However, the AI bubble poses a significant risk.
The potential bursting of the AI bubble and renewed global inflation could trigger volatility. While investors may capitalize on sell-offs, predicting bubble bursts is challenging. Bassanese suggests the market is in the early to mid-stages of a potential bubble, as AI computing capacity outpaces supply.
UBS anticipates AI will drive further global equity gains, but warns investors of bubble risks. Crypto assets, including Bitcoin, have faced downward pressure due to market bubble fears. IG Australia's Tony Sycamore expects Bitcoin to decline in the new year, potentially retesting its 2025 lows after Trump's tariff announcements.
A Bitcoin decline would impact younger Australians who increasingly view crypto as a means to supplement income for rising living costs. Finder data reveals young adults under 30 as the most active crypto investors.
- Precious Metals: A Safe Haven?
Precious metals, including silver, gold, platinum, and palladium, have experienced significant gains. CMC Markets' Luis Ruiz attributes this to their traditional safe-haven status, which becomes more attractive during periods of uncertainty.
Ruiz notes that demand for these metals is driven by deep-rooted factors unlikely to diminish quickly. New investors are entering the market, and existing holders are reluctant to sell unless necessary. Despite sharp price corrections, both silver and gold have rebounded after recent sell-offs.
The Australian share market could benefit from ongoing precious metal demand, given the country's rich gold and silver deposits. However, sharp price increases may signal impending economic challenges.
