Inflation has edged lower, yet major banks have warned that energy price shocks could significantly push up inflation – heightening the chance of more cash rate hikes.
The latest inflation figures have shown only a glancing step towards the Reserve Bank’s target band, with all four major banks cautioning that rising fuel and energy costs are likely to drive CPI sharply higher, keeping the cash rate on an upward path.
Inflation rose 3.7 per cent over the year to February 2026, easing slightly from 3.8 per cent in January.
Housing remained the dominant driver, with annual prices in the category up 7.2 per cent, while food and non‑alcoholic beverages rose 3.1 per cent and recreation and culture climbed 4.1 per cent.
Trimmed mean inflation – the RBA’s preferred gauge – held steady at 3.3 per cent, unchanged from January and still above the 2–3 per cent target band.
The figures come in the wake of back‑to‑back 0.25 per cent cash rate rises in February and March – delivered against the backdrop of a still‑tight labour market and oil and petrol supply shortages and price hikes due to the ongoing military conflict in the Middle East.
With markets and all four major banks predicting another 25-basis-point move in May, attention has swung from the modest dip in February CPI to what lies ahead for prices and the cash rate.
ANZ sees fuel shock feeding through economy
Australia and New Zealand Banking Group (ANZ) senior economist Adelaide Timbrell said the data was pointing to a higher-than-expected underlying result for the March quarter and flagged a risk that core inflation could surprise on the high side.
She said the January and February outcomes “suggested a trimmed mean outcome in Q1 of 0.9 per cent q/q with upside risk, with a 1 per cent q/q much more likely than a 0.8 per cent q/q”.
Timbrell warned that the impact of recent fuel price increases was likely to spread more broadly through the economy as the year progressed.
On the headline measure, ANZ has revised its expectations for the March quarter, citing the sharper‑than‑anticipated run‑up in petrol prices.
“On the headline, we now expect 1.4 per cent q/q in Q1, higher than our previous expectation of 1.2 per cent q/q,” she said.
Despite the slightly softer read on certain services components in February, ANZ said it believed policy tightening was not yet finished.
“We continue to expect one more 25bp rate hike from the RBA in May of this year,” Timbrell said.
NAB and CBA continue to back a May hike
NAB senior economist Taylor Nugent described the February CPI print as marginally softer than anticipated.
“Inflation came in a tenth lower than our forecast for both headline and trimmed mean in February, but the detail and the translation through to the quarterly trimmed mean outcome is broadly in line with our assessment,” he said.
Nugent said that the latest CPI numbers, together with the recent uptick in the unemployment rate, slightly reduced the RBA’s concerns about persisting capacity pressures, but said they were not enough to lower the prospect of further hikes.
He stressed that “NAB continued to see the RBA raising interest rates to 4.35 per cent in May”, and cautioned that “looking forward, headline inflation will jump to around 4.5 per cent in March”, a near 1 per cent monthly rise.
The Commonwealth Bank of Australia delivered a similar message, emphasising that underlying inflation had edged back but remained uncomfortably firm.
“Underlying pricing pressure in the domestic economy remains too strong for the RBA’s comfort,” CBA said.
The bank said its estimate for quarterly trimmed mean inflation was unchanged at 0.9 per cent.
Looking ahead, CBA highlighted the potential for the ongoing conflict between the US and Israel and Iran and associated energy market disruptions to push inflation, and expectations, higher than previously anticipated.
The bank said the February CPI release “reaffirms our call that the RBA will lift the cash rate at its May meeting, although we expect it will be a line ball decision given heightened uncertainty”.
Westpac says inflation to increase to 5.5%
Westpac senior economist Justin Smirk took some comfort from the figures, saying that it signalled an improvement before the most recent geopolitical shock.
“The softest update on core inflation in just over half a year suggests that inflationary pressures were moderating at the start of 2026, prior to the Middle East conflict,” he said.
However, Smirk said the bank now expected a substantial rebound in headline CPI as the surge in fuel costs worked its way through the data over the coming months.
“Headline inflation will be around 5.5 on a monthly basis, by mid-year”, with the bank attributing the majority of the rise to higher petrol prices, while “core inflation will show a more modest lift to around 3.5 per cent over the same period of time”.
[Related: Unemployment lifts as majors lock in May hike call]
