Inflation has eased back for the second month in a row, bolstering the case for an interest rate pause when the Reserve Bank board meets next week.

Consumer prices lifted 6.8 per cent in the 12 months to February, sinking from 7.4 per cent annual growth in January.

Another slowdown in the Australian Bureau of Statistics’ monthly consumer price index was anticipated but the moderation was sharper than expected, with consensus forecasts pencilling in a 7.2 per cent rise in the year to February.

Housing made the biggest contribution to the annual inflation reading, but at 9.9 per cent annual growth was down from 10.4 per cent in January.

The other major contributors to annual growth flagged by the ABS – food and non-alcoholic beverages, transport and recreation – also softened over the month but remained elevated.

Rent prices, however, stayed steady at 4.8 per cent annual growth for the second month in a row, with the tight rental market and low vacancy rates keeping pressure on rents.

Advertisement
Advertisement

February also recorded a larger-than-expected softening in holiday travel and accommodation, which eased 14.9 per cent over the year, from 17.8 per cent in January.

ABS head of prices statistics Michelle Marquardt said the sharp turnaround in holiday-related prices followed strong demand for domestic and international airfares in the lead-up to Christmas and over the school holidays.

Treasurer Jim Chalmers welcomed “a number with a six in front of it” but said inflation remained unacceptably high and well above the RBA’s target range of two-to-three per cent.

“It’s more evidence that inflation peaked at the end of last year and it’s moderating this year, but it will be higher than we’d like for longer than we’d like,” he told parliament on Wednesday.

The monthly CPI gauge, which offers a timelier but less complete picture of consumer price movements when compared to the quarterly index, was the final data source on the RBA’s watchlist ahead of its April cash rate decision.

The central bank has given itself room to pause or hike again depending on incoming data flows and economists are split on which way it will fall.

Advertisement
Advertisement

Data since the March rate hike has been mixed – soft inflation and retail trade data suggest the economy is losing momentum, while strong employment and business conditions point to ongoing resilience.

KPMG chief economist Brendan Rynne said the RBA would likely follow other central banks and continue lifting rates.

“While today’s data will give the RBA pause for thought, KPMG believes inflation is still sufficiently high and employment too strong for the RBA to call a halt to the cash rate rises just yet,” Dr Rynne said.

He said Australia appeared to be on the same course as its global peers in the fight against inflation, with price rises seemingly past their peak but concerns about stubbornly high core inflation still playing out due to the tight economic environment.

AMP Capital senior economist Diana Mousina said the monthly inflation report and other key data sources should be enough to convince the RBA to move to the sidelines next week.

She said the banking crisis in the US and Europe – partly driven by higher interest rates – would also weigh on the board’s decision-making.

Advertisement
Advertisement

The firm’s economists expect a pause at the RBA’s meeting next Tuesday, followed by rates being cut later in the year.

© AAP 2023

Get more from Moyra & Big Trev