The inflation data released today reflects conditions prior to the onset of hostilities in the Gulf on 28 February and in several categories where inflation had been easing, cost pressures are now turning upward.
Headline inflation rose at an annual rate of 3.8% in February, slightly below the 3.9% pace recorded in January. Even so, inflation remains well above the RBA’s 2–3% target band and is trending higher.
Trimmed mean inflation, the RBA’s preferred measure of underlying price pressures that smooths out volatile items, was unchanged at 3.3% year on year. On a monthly basis, trimmed mean inflation rose by 0.2%, easing from six consecutive months of 0.3% increases.
Services inflation remained sticky with the annual rate holding at 3.9% in February. The strongest price growth was in domestic holiday travel, which rose 8.8% over the year. This part of the services sector now faces disruption. Dubai International is the world’s busiest airport for international passenger traffic and air travel across other major Gulf hubs is also being affected.
Non-discretionary inflation, driven by essentials such as food and fuel, is likely to remain more persistent and elevated than discretionary inflation, given how broad based these cost pressures are.
We are hearing early indications that fuel surcharges are beginning to re‑emerge in service sector pricing. While initially reported in parts of hospitality, this points to rising cost pressures more broadly. The macro impact is likely to be a mix of higher prices for consumers and margin compression for businesses, adding to near‑term inflation risks.
Goods inflation eased to 3.5% from 3.8% in February, but near‑term pressures are building. The escalation of hostilities in the Gulf is disrupting a critical global logistics hub. Air and sea freight capacity is being constrained, while costs are rising. Some cargo can be diverted, but this comes with longer transit times and higher freight costs. International logistics providers are already introducing emergency surcharges, pointing to renewed upward pressure on goods prices.
Based on current information, which is still evolving, we expect headline inflation to rise above 5% in the coming months. The outcome could be higher depending on the duration and intensity of the conflict, which remains highly uncertain. This keeps the prospect of a rate hike at the May Board meeting in play. At the same time, higher fuel prices are acting as a tax on household and business spending, weighing on demand and activity.
The likely near‑term outcome is a period of elevated inflation alongside softer growth before inflation eventually returns to the target band. Even if the conflict were to end within the next fortnight, oil supply is likely to take up to six months to normalise, and potentially longer, implying ongoing pressure on prices and growth.
