Feb'26 CPI: Prices stuck on stubborn

The Consumer Price Index (CPI) rose 3.7 per cent in the 12 months to February 2026, easing slightly from 3.8 per cent in January. While any downward movement is welcome, it would be premature to read this as a turning point. The modest improvement is largely a story of composition rather than genuine broad-based cooling, with fuel prices falling sharply ahead of the Middle East conflict escalation providing a temporary drag on the headline, while the domestic inflation engine continues to run warm. 

What makes this print particularly difficult for the Reserve Bank of Australia (RBA) is the behaviour of underlying inflation. The trimmed mean held flat at 3.3 per cent for the second consecutive month, unchanged from January and still above target, signalling that the disinflation process has stalled. Unlike the headline, the trimmed mean strips out large price swings such as fuel and electricity volatility, giving a cleaner read on persistent inflationary momentum. Its steadiness at 3.3 per cent tells the RBA that price pressures are not broadening further but, critically, are not narrowing either.

With services inflation anchored at 3.9 per cent annually and non-tradables running at 5.0 per cent, the domestically driven components of inflation remain stubbornly elevated.

The bottom line is that domestic price pressures were not yet resolved when the Middle East conflict emerged, adding an external supply shock to an inflation story that was already proving difficult to shift.

Monetary Policy Implications

Headline inflation has nudged lower, but the trimmed mean's lack of movement removes any need to even consider relaxing the policy stance. The RBA will be watching closely for whether the fuel price shock from the Middle East conflict, which was still building at the time of the February print, passes through into broader price expectations or gets absorbed. A second-round effect through transport costs and input prices would threaten to push underlying inflation higher again.

We expect the RBA to remain on hold in the near term while penciling in one more 25bps rate hike. The May meeting remains the next live moment for any policy reassessment, as quarterly trimmed mean data sheds more light on the persistence of domestic inflation. Until underlying inflation shows a convincing move towards 3 per cent, the bar for any easing remains high.

We expect policy rates to stay higher for longer.

CPI Movers and Shakers

Housing inflation accelerated to 7.2 per cent in the year to February, up from 6.8 per cent in January and the largest single contributor to annual CPI. The dominant force is electricity, which surged 37 per cent over the year as Commonwealth and State energy bill relief rebates were exhausted by households. Stripping out those rebate effects, electricity prices rose a more contained 4.9 per cent, reflecting energy retailer price reviews from July 2025 - a useful reminder that the volatility in the headline electricity figure overstates the true momentum in energy pricing.

Rents rose 3.8 per cent over the year as vacancy rates remained tight across most capital cities, and new dwelling prices edged higher to 3.7 per cent as project home builders passed through higher labour and material costs.

Food and non-alcoholic beverage inflation held at 3.1 per cent, unchanged from January, but the detail remains uncomfortable. Meals out and takeaway prices rose 3.7 per cent as hospitality businesses continued to pass through wage and ingredient cost increases, while beef and lamb prices each rose around 13 per cent, driven by strong overseas demand for Australian red meat. These are not transitory pressures - they reflect structural cost dynamics in the services and agriculture sectors that are unlikely to unwind quickly.

Transport was the standout offset in February, with the group falling 0.2 per cent over the year - the first annual decline in some time. Automotive fuel prices dropped 7.2 per cent annually and fell 3.4 per cent in February alone, following a 3.2 per cent fall in January, as softer global oil conditions ahead of the Middle East escalation fed through to the pump. That disinflationary tailwind, however, is now at material risk of reversal.

Recreation and culture rose 4.1 per cent annually, with domestic holiday travel and accommodation the key driver as summer school holiday demand faded in monthly terms.