The latest inflation indicator data the ABS released on Wednesday revealed consumer price index (CPI) held at a two-year low of 3.4% in the 12 months to February, defying market expectations of a slight uptick to 3.5%. 

All four major banks expected to see a rise in headline inflation, with ANZ placing it at the same rate as market consensus, NAB at 3.6%, and CommBank and Westpac at a much higher 3.8%. 

CommBank anticipated the annual increase in education costs along with the end in seasonal goods discounting and electricity rebates would steer inflation up.

Westpac, meanwhile, banked on the rise in petrol prices and the ‘Taylor Swift effect’ on travel and accommodation as potential drivers of consumer prices.

NAB likewise expected a “more modest pullback” in travel prices than a year ago to send inflation higher in February. 

However, the annual increase was in fact driven by housing (up 4.6%), food and non-alcoholic beverages (up 3.6%), alcohol and tobacco (up 6.1%), and insurance (up 8.4%), according to the ABS.

Holiday travel and accommodation did not deliver the expected rise, falling 1.3% over the year. 

“Although Taylor Swift performances saw hotel prices rise in Sydney and Melbourne, elsewhere accommodation and airfare prices fell in February due to the end of the peak of travel during the January school holiday period,” ABS head of prices statistics Michelle Marquardt said. 

Underlying inflation, which excludes volatile components of the CPI basket like fuel and holiday travel, was at 3.9%, down from 4.1% in January. 

“Annual inflation excluding volatile items has continued to slow over the last 14 months from a high of 7.2% in December 2022,” Ms Marquardt said.

February CPI offers firmer data for the RBA

Although the monthly reading presents lesser weight compared to quarterly CPI, the RBA is expected to give a much closer look at the February print as it provides more substantial data than the CPI in the month prior.

“There is better services coverage in February that can help gauge domestic pressures, though the RBA has the luxury of waiting for the full Q1 CPI ahead of their May meeting and forecast update,” NAB senior economist Taylor Nugent said.

Slowing inflation was the reason the RBA decided to leave the cash rate unchanged at 4.35% after their monetary policy meeting in March.

However, RBA Governor Michele Bullock was adamant in saying greater confidence in terms of inflation returning to target is needed before the Board considers moving the interest rates down. 

“The RBA would take comfort in the current trajectory of inflation, with inflation on track to undershoot their Q1 forecast of around 0.8% q/q,” ANZ senior economist Catherine Birch said 

“But there are some signs that we may encounter the ‘last mile’ challenge,” she added.

Gov Bullock cited elevated services inflation as one of the risks to the Reserve Bank’s target. 

And today’s read revealed services and non-tradeable inflation remain high, at 4.2% and 4.8%, respectively. 

Rent accelerated to 7.6% as low vacancy rates continued to drive prices higher. Meanwhile, rises in premiums across all insurance types sped up insurance inflation to 16.5%. 

Despite these figures, coupled with strong yet volatile unemployment data last week, economists who are pencilling rate cuts to happen sometime in the second half of the year remain undeterred in their forecasts. 

“We don’t see too much dramatic implications in terms of our rate call for the RBA to move rates in November,” NAB head of market economics Tapas Strickland said.

Photo by Rosa Rafael on Unsplash