The opening for the RBA to pause rate hikes next week became a little wider after this morning's CPI report for February. The 12-month CPI declined from 7.4% in January to 6.8%, lower than the 7.2% expected, and is well down from the high in December (8.4%). This all but confirms Q4 as the peak, with headline inflation likely to fall to around 7% in the main CPI release for Q1 (due 24/4). The core rate also softened in February, with CPI ex-volatiles sliding from 7.5% to 6.9%yr.
While Australian inflation remains well above the RBA's 2-3% target band, the inflationary pulse coming from key categories is losing momentum. Notably, the surge in travel costs driven by strong demand over the peak summer holiday period was largely unwound in February.
Food and home building costs have risen sharply over the Covid period but are continuing to plateau. Falling prices in traded goods on the back of lower demand and improved supply chains look to finally be starting to flow through to Australian households.
However, households are being hit by surging electricity prices (17.2%yr); fuel prices meanwhile are well down from the highs in early 2022 in the early stages of the war in Ukraine but remain elevated.
The full details won't be known until the quarterly inflation report is published in late April, but there looks to be sufficient evidence for the RBA ahead of next week's meeting for it to confirm its priors that Q4 was the peak for the CPI. Whatever way one looks at it, the momentum is now with lower not higher inflation. To be clear, inflation is still a problem but the full effects of the RBA's tightening cycle on demand conditions are yet to play out.
The RBA Board downgraded its assessment of the risks of a wage-price spiral in Australia at the March meeting and put the option to pause rate hikes back on the table. With many of its central bank peers close to sitting on the sidelines amid an expected tightening in lending conditions following the strains that have emerged in the US and European banking systems, the RBA may conclude now is the time to pause.