High inflation reinforces view that Australian economy has hit ‘speed limit’: Economists
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More news: High headline inflation in the year to February has strengthened views that the Australian economy has hit its productive capacity limit but economists warn the data set is outdated due to distortions from the Iran war.
Deloitte Access Economics head Pradeep Philip said “these pre-conflict figures highlight the urgent need to lift the productive capacity and run rate of the economy”, which will weigh on the upcoming May federal budget and RBA interest rates decision.
“The figures reinforce the fact that the Australian economy has hit its speed limit, which was the RBA’s central fear and primary motivation for hiking rates last week,” Philip said.
However, Philip warned that elevated risks from the US-Israel war with Iran has already reshaped Australia’s economic outlook although its full impact is still uncertain.
“Time will tell whether last week’s rate hike was a prudent safeguard against domestic pressures and external shocks, or a premature move that risks weakening an already fragile economy being rocked by forces beyond its control,” Philip said.
Moody’s Analytics head of Australia economics Sunny Nguyen said: “Let’s get this out of the way: disinflation has stalled.”
“The risk the RBA will be weighing after this print is not so much that it has overtightened, but that it may ultimately need to do a little more if domestic services and housing-related inflation fail to cool in the coming months,” Nguyen said.
Meanwhile, Westpac economist Justin Smirk characterised the data as “the softest update on core inflation in just over half a year”, suggesting inflationary pressures moderated at the start of 2026.
State Street Investment Management APAC economist Krishna Bhimavarpu said
However, it was a widespread view that the RBA will be paying much closer attention to the anticipated inflation spike in March from the oil supply and fuel availability shock driven by the Middle East conflict.
Oliver Hume chief economist Matt Bell said “the driver of inflation and rates has clearly shifted from the domestic to the global”.
“The outlook for property for the remainder of 2026 has become as uncertain as the outlook for the Middle East crisis and rates. Fundamentals remain in place for ongoing strong demand, but plunging consumer sentiment and a potential return to excessive construction cost growth are serious risks,” Bell said.
Treasurer Jim Chalmers said that “while we’ve seen inflation tick down today, it was too high before the war and the conflict in the Middle East will make it worse”.
However, he did not reference concerns that Australia is near its productive limits. Instead, Chalmers argued that “inflation challenge reflects a mix of both temporary and persistent factors, including the end of energy rebates”.
“We recognise people are still under pressure, which is why we’re rolling out responsible cost of living relief and taking action to shore up fuel supply and ensure Australians are getting a fair go at the bowser,” Chalmers said.
“This includes new legislation introduced today that will double penalties for petrol price misconduct.”
CPI rises 3.7% in 12 months to February
The news: The consumer price index (CPI) increased by 3.7% in the 12 months to February 2026, just below the consensus expectation for a 3.8% increase in the headline figure.
Trimmed mean inflation for the 12 months to February came in at 3.3%, below the market consensus expectation for a 3.4% lift and unchanged from January.
The numbers: The CPI increase in the year to February was lower than the 3.8% lift in the 12 months to January and to December.
Annual inflation was predominantly driven by housing (+7.2%), food and non-alcoholic beverages (+3.1%) and recreation and culture (+4.1%).
Annual housing inflation was up from the 6.8% increase in January on higher electricity costs, new dwellings and rents.
Electricity costs lifted 37% in the 12 months to February, up from 32.2% in January. This was again largely due to Commonwealth Energy Bill Relief Fund and various state government rebates being used up. Excluding these effects, electricity prices rose 4.9%.
On a month-on-month basis CPI was unchanged in original terms and up 0.2% in seasonally adjusted terms. Consensus expectations were for no CPI growth in original terms and a 0.3% increase in seasonally adjusted terms.
The context: According to the February 2026 statement of monetary policy the RBA was expecting headline consumer inflation to remain above the midpoint of the central bank’s target band until early 2027, peaking at around 4.2% mid-year.
The February CPI data does not capture the impact of the oil shock sparked by the US-Israel war with Iran that commenced on 28 February 2026.
The RBA monetary policy board voted to hike interest rates at its February and March meetings amid a tighter than preferred labour market, growth in private demand, and concerns the economy was running beyond its productive capacity limits.
At the March meeting they also noted “developments in the Middle East remain highly uncertain, but under a wide range of possible scenarios could add to global and domestic inflation”.
Treasurer Jim Chalmers has released modelling that suggests inflation could hit 5% off the back of a prolonged Iran war and if oil prices remain elevated.
The next RBA monetary policy board rates decision is scheduled for 5 May.
The sources: ABS media release, ABS data
