The Consumer Price Index (CPI) rose 3.7 per cent in February, down 0.1 per cent from the previous month, but remains above the Reserve Bank’s target band.

The latest figures from the Australian Bureau of Statistics showed that housing, food and non-alcoholic beverages were the largest contributors to price growth last month.

Underlying inflation, the Reserve Bank’s preferred measure that strips out large price movements, was steady at 3.3 per cent.

The latest inflation data does not capture the energy price spike caused by the US and Israel’s war with Iran, which began on February 28.

Westpac Group chief economist Luci Ellis said while today’s headline number was lower than expected, the full inflation picture would not be known until next month when the impact of surging energy prices was captured in the CPI data.

“Let’s be clear, this is the starting point ahead of the outbreak of conflict in the Middle East, so this is really a slightly better starting point for underlying inflation,” she said.

“This will be overtaken by events, and we are expecting headline inflation to head up to around 5 per cent.”

Wednesday’s inflation figures followed the Reserve Bank’s decision last week to lift interest rates for the second time this year, with the bank’s monetary policy board noting that a tight labour market and capacity pressures were key factors in its decision.

The RBA warned that the conflict in the Middle East could push inflation higher, but the immediate impact would not be known until next month’s figures were released by the ABS.

Dr Ellis said fuel price spikes had changed people’s expectations for future inflation, and that was something the Reserve Bank would be cautious about.

“Because of the escalation in fuel prices there has been an increase in inflation expectations, and the RBA wants to make sure that that doesn’t linger and that higher inflation expectations don’t get embedded into higher inflation. They want this to be a one-off shock,” she said.

War will make inflation worse

Treasurer Jim Chalmers said while it was pleasing to see headline inflation cool slightly prior to the Middle East war, it was still too high and would worsen.

“The war will make things harder for Australians,” he told reporters in Canberra.

“We know that inflation was already too high in our economy and the conflict in the Middle East will push inflation higher for longer.”

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Last week, the government released Treasury modelling showing that a prolonged conflict pushing oil prices over $US120 a barrel and reducing slowly could see inflation rise to 5 per cent.

Today, he conceded those scenarios “look pretty conservative now” and has asked Treasury to undertake modelling on “more challenging circumstances”.

Oil prices temporarily hit $US119 a barrel this week.

“There are two key considerations here. First of all, the timing of the end of the war and secondly, how long it takes for the global economy to get back on track after the hot part of the hostilities,” Mr Chalmers said.

“Those are really the two key variables which play out in all of our scenario planning and all of our modelling”.

Mr Chalmers said markets had reacted positively to proposed talks between the US and Iran.

“What that makes clear purely from an economic and market point of view is that the end of this war can’t come soon enough for the economy,” he said.

Last night, the treasurer told a Business Council of Australia dinner that the economic impacts of the war could be as damaging as the global financial crisis and COVID-19.

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