Hopes are mounting that the relentless succession of interest rate hikes is close to ending after inflation fell for a second consecutive month.
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The monthly consumer price index reached 6.8 per cent in February, down from 7.4 per cent January and 1.6 percentage points lower than the peak reached in December. This is the slowest rate since mid-2022.
The result was well below market expectations and has bolstered the chances that the Reserve Bank of Australia board will leave the official cash rate unchanged at 3.6 per cent when it meets on April 4 - the first pause since the current cycle of rate hikes began last May.
The outcome was welcomed by Treasurer Jim Chalmers as "a very encouraging sign".
"It's more evidence that inflation [has] peaked and it's moderating this year," Dr Chalmers said, though he admitted it will be "higher than we'd like for longer than we'd like".
The moderation in price pressures adds to signs that 10 successive rate rises are working to dampen demand in the economy even though their impact has so far been blunted by an unusually high number of fixed rate mortgages in the system.
Housing was again a major driver of living-cost increases, rising 9.9 per cent last month, as the size of electricity bills surged 17.2 per cent and the cost of a new home jumped 13 per cent, according to the Australian Bureau of Statistics.
Prices for holiday travel and accommodation also grew strongly, rising by 14.9 per cent, though this was well below the 29.3 per cent reached in December. Reflecting improving conditions on global markets, the cost of automotive fuel grew by just 5.6 per cent after spiking above 43 per cent in in mid-2022.
Growth in prices for basics including fruit and vegetables, meat and clothing has eased since late last year despite the impact of flooding and elevated transport costs. But education fees jumped 5.6 per cent, their fastest pace in five years. The ABS said tertiary fees had been pushed up by inflation and the effects of the Morrison government's Job-ready Graduate policy while secondary and primary school cost increases were being driven by higher wages for teachers and staff.
Dr Chalmers warned that monthly inflation figures can be volatile and urged caution in interpreting the result.
But confidence is growing that the peak of inflation has passed, though the decline is forecast to be gradual. The RBA does not expect it to fall back within its 2 to 3 per cent target band until mid-2025, suggesting any rate cuts will be some time off.
HSBC Australia chief economist Paul Bloxham expects the RBA to pause rates next week and predicts it will hold them steady for an extended period.
"Our rule of thumb has been that, once the RBA is convinced that inflation has peaked and that the unemployment rate has troughed, the RBA would pause," Mr Bloxham said. "We now have more evidence that inflation has indeed passed its peak, economic activity is slowing, and the unemployment rate is past its trough."
The latest inflation result follows the release of other ABS data closely tracked by the central bank showing retail sales grew a moderate 0.2 per cent last month, while a jump in employment pushed the jobless rate back down to 3.5 per cent, and business conditions remained solid even though confidence has weakened.
KPMG chief economist Brendan Rynne thinks that although inflation is easing it still remains too high and employment is too strong for the RBA to call a halt to rate rises "just yet", tipping a hike next week.
Reserve Bank governor Philip Lowe has said the central bank wants to bring inflation down while limiting the extent to which unemployment increases as the economy slows.
Leading independent economist Chris Richardson has said the path to achieving this has become increasingly narrow but Dr Rynne said lowering inflation without causing a recession was "a very plausible scenario".
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Mr Bloxham said the path to achieving this is shrouded by uncertainty about the impact of the rate hikes made so far, the extent to which households draw on savings to support spending and the impact of the shift of more than 800,000 mortgages this year from fixed to variable rates.
A spate of bank collapses and forced acquisitions in the United States and Europe this month adds to the complexity of the RBA's task, though few expect this to be decisive. Both the US Federal Reserve and the European Central Bank have raised their rates despite the volatility on financial markets, suggesting this is unlikely to deter the Reserve Bank lifting the cash rate if it considers it necessary.
ANZ economists said quick action had "ring-fenced" offshore banking sector issues while wages pressures were building, including the incoming NSW Labor government's pledge to scrap a 3 per cent cap on public sector wages and a indications the federal government will back an inflation-linked increase in the minimum wage. They tip an April rate hike.
The Australian Industry Group, an employer organisation, has urged wage restraint.
Chief executive Innes Willox said that although the moderation in inflation was encouraging, it "reinforces the need for...wage restraint in the coming National Wage Review".
Deputy Opposition Leader Sussan Ley said that despite the moderation in inflation in the past two months, it remained "far too high".
Ms Ley said the data confirmed "what Australians already know, [that] households are going backwards", with interest rates, electricity bills and living costs all rising.