Australia’s inflation pulse showed tentative signs of easing in February, with both headline and core measures coming in slightly softer than expected ahead of a sharp escalation in global geopolitical risks.
The latest data from the Australian Bureau of Statistics (ABS) showed the monthly Consumer Price Index (CPI) rising 3.7% year-on-year, just below market expectations of a steady print of 3.8%. On a monthly basis, prices were flat, undershooting forecasts for a modest increase.
Underlying inflation eased in monthly terms, with the trimmed mean rising 0.2% in February after several months of firmer gains. The annual rate held steady at 3.3%, where it has now sat for three consecutive months.
Core inflation shows early signs of easing
Westpac senior economist Justin Smirk said the February data pointed to moderating inflationary pressures at the start of the year, before war in Iran began to reshape the outlook.
“The softest update on core inflation in just over half a year suggests that inflationary pressures were moderating at the start of 2026, prior to the Middle East conflict,” Smirk said.
Core inflation rose just 0.2% over the month, below expectations, driven in part by a softer-than-expected increase in dwelling costs. New dwelling prices rose only 0.1% — the smallest monthly increase since May 2025 — while broader weakness was also evident across household goods and services.
On a seasonally adjusted basis, CPI rose 0.2% in February, leaving the annual pace unchanged.
Smirk noted that the trimmed mean also undershot forecasts, rising 0.2% for the month versus expectations of 0.3%, signalling a modest easing in underlying momentum after several months of steadier gains.
Housing remains sticky, but surprises to downside
While housing and rents remain key drivers of inflation, February’s data delivered some downside surprises.
Rents rose 0.4% over the month, broadly in line with expectations, while electricity prices increased 1.0%. However, this largely reflects the unwinding of government rebates, with the ABS noting electricity prices have now returned to levels consistent with pre-subsidy settings.
Other categories showed mixed movements:
- Holiday travel and accommodation fell 6.3% in February, led by declines in both domestic and international travel
- Education costs rose 4.5%, below expectations, with more modest increases in primary and tertiary education
- Clothing and footwear rose 2.6%, driven by strong gains in women’s garments and footwear
- Household goods inflation remained subdued, with falling prices in childcare, cleaning products and glassware
The moderation in several categories contributed to the softer-than-expected headline and core prints.
Fuel and geopolitics set to reshape outlook
Despite the softer February reading, economists are cautioning that the inflation outlook has shifted materially in recent weeks.
Smirk said the data “predates recent Middle East developments and the sharp lift in crude oil and fuel prices”, with Westpac now expecting headline inflation to rise to around 5.5% year-on-year by mid-2026, largely driven by higher fuel costs.
Core inflation, however, is expected to remain more contained, peaking closer to 3.5% over the same period.
Krishna Bhimavarapu, APAC economist at State Street Investment Management, said markets are increasingly focused on how the Iran conflict could feed through to inflation and growth.
“Markets are clearly becoming more alert to the macro implications of the Iran conflict, and Australia is not immune,” Bhimavarapu said.
“A quick end would likely bring a brief burst of inflation, while a prolonged shock raises the risk of global demand slowing enough to flirt with recession, which is not our base-case.”
He added that the February CPI print was “encouraging,” particularly with fuel prices falling before the conflict began, but warned that outlook is likely to change.
“Even as housing and rent inflation stay sticky, we expect inflation firming up in coming months and do not think we are yet in a ‘demand destruction’ phase.”
RBA outlook in focus
For policymakers, the February data provides some evidence that underlying inflation was tracking in the right direction before external shocks intervened.
However, the expected rebound in fuel-driven inflation and ongoing strength in housing costs are likely to complicate the Reserve Bank’s path in the months ahead.
While core inflation remains closer to target, the divergence between headline and underlying measures — particularly if energy prices continue to climb — could keep the central bank in a cautious holding pattern.