Australian inflation softened slightly on the eve of the energy price shock coming in below expectations in February. Headline CPI was flat (0%) month-on-month, down from 0.4% in January, slowing the annual rate from 3.8% to 3.7% (vs 3.8% expected). In underlying terms, inflation remained above the top of the RBA target band (2-3%) with the trimmed mean measure (0.2%m/m) holding at 3.3%yr. Markets put the odds of a third consecutive 25bps rate hike in May at 67%.
Headline inflation slowed in February to 0%m/m from 0.4%m/m in January, softening the annual pace from 3.8% to 3.7%. Ironically, petrol prices (-3.4%) were a key factor behind this - but this was prior to the escalation of the Middle East conflict - while domestic travel (-7.4%) post the summer holidays also played a role.
Fuel prices had fallen significantly by around 7% over the year to February, making the current surge feel even more acute. Prices in February were down 3.4% after a 3.2% decline in January, with the last instance of back-to-back monthly falls of 3% coming in August (-3.1%) and September (-3.9%) of 2024. Alongside surging fuel prices, households are also facing significantly higher costs for electricity with government rebates rolling off. Across the past 12 months, electricity costs have risen 37%.
Excluding the effects of volatile price changes, core inflation (measured by the trimmed mean) was broadly steady in February. The monthly rate was 0.2% and the annual pace was 3.3%, unchanged for the third month running. Overall, the momentum in core inflation is running above the target band (the RBA is required to hit the midpoint), with the 3-month annualised pace at 3.2%. Core inflation reflects more of the price pressures being generated by strong household demand, which the RBA in raising rates last week said it needed to temper.
