Australia's 12-month inflation rate remained at 3.4% in February, unchanged since December and defying expectations for a rise to 3.6%. Progress over recent months has been encouraging and suggests inflation remains on track to come back to the RBA's target band, but services prices remain a sticking point in terms of holding the Board back from cutting rates.
February's report was a little mixed. Encouraging progress continued regarding headline inflation, though the underlying measures showed signs of stickiness. Headline CPI was unchanged at 3.4%, halving from its pace this time last year (6.8%) and down even more significantly from its peak at the end of 2022 (8.4%). Further declines look likely with inflation in 3-month annualised terms now 2% and 2.2% in 6-month annualised terms, indicating the recent momentum is consistent with inflation below the midpoint of the RBA's 2-3% target band.
However, the RBA has repeatedly communicated caution around the inflation outlook, reaffirming this at last week's meeting. Both of the key measures of underlying inflation are showing slower progress than the headline CPI; CPI ex-volatile items and holiday travel eased from 4% to 3.9% (in seasonally adjusted terms), the trimmed mean measure also printed at 3.9%, firming from 3.8% in January.
Higher underlying CPI is underpinned by elevated services inflation, which was reported to have lifted from 3.7% to 4.2%. The increase can be explained by the data for February incorporating a much broader range of services price updates than in the January series. Looking past the month-to-month movements, the chart below shows 12-month services inflation has fallen materially over the past year, though it still remains high.
A notable contributor to higher services inflation in February was insurance, which is up by 16.5% over the past year, with rising claims, natural disasters and reinsurance costs all playing a role. Housing-related inflation remained at 4.6%yr, though rents firmed from 7.4% to 7.6% reflecting very low capital city vacancy rates.
In the other direction, declining holiday travel and accommodation prices (-1.3%yr) are a weight on services inflation. The ABS reported that although the Taylor Swift Eras Tour boosted hotel prices in Sydney and Melbourne, this was more than offset by seasonal falls for airfares and accommodation in other parts of the country post the school summer holiday period.
Other key components in food and fuel prices saw contrasting movements. Food inflation softened from 4.4% to 3.6%, its slowest since January 2022; however, fuel inflation lifted from 3.1% to 4.1%.
