Calm before the storm? Inflation eases, for now

Inflation has taken a small step back, but most households wouldn't notice it at the checkout. While the official numbers show price pressures easing slightly in February, everyday costs are still rising, and worse may be on the way.

The Consumer Price Index (CPI) rose 3.7% in the 12 months to February 2026, down marginally from 3.8% in January, according to the Australian Bureau of Statistics (ABS).

That apparent cooling came before the oil shock triggered by the Iran conflict on March 3, meaning the data does not yet reflect the surge in fuel prices now hitting households and businesses.

"There are some tentatively encouraging signs that inflation momentum was easing before what will be a lift driven by higher petrol prices over the next few months," Stephen Koukoulas, managing director at Market Economics, posted on LinkedIn.

Others are less convinced any relief was ever really under way.

"Today's CPI figures offer little reprieve in the fight against inflation," says Sally Tindall, Canstar's director of data insights.

"There's no calm before the storm. Instead, it's persistent inflation that is set to spike once the Middle East conflict flows into next month's data, just six days out from the RBA's next meeting."

How is inflation measured

So what's actually sitting behind the latest inflation number?

In Australia, inflation is measured using the Consumer Price Index, or CPI. It tracks changes in the prices of a broad "basket" of goods and services households buy regularly.

The Australian Bureau of Statistics collects prices for thousands of items each month, sorting them into 87 categories across 11 major spending groups. Each item is weighted according to how much households typically spend on it. The more we spend on something, the more sway it has over the final inflation figure.

Which is where fuel comes in.

Petrol's small weight, big influence

Based on household spending data used by the ABS, Australians spend about $2300 a year on automotive fuel. That gives petrol a weight of roughly 3.3% in the CPI basket.

That may not sound like much, but fuel prices are among the most volatile items in the index. Big moves at the bowser can quickly drag inflation down or push it sharply higher.

That was clear during the early stages of COVID-19, when petrol prices plunged about 20% in a single quarter, accounting for nearly half of the record 1.9% quarterly fall in the CPI.

The reverse is now shaping up.

Why higher fuel prices haven't shown up in the data... yet

The February inflation data was captured before the oil shock linked to the Iran conflict in early March. Since then, petrol prices have surged.

According to Fuel Spot, the average price of unleaded 91 on Wednesday, March 25 sits at 240.5 cents a litre. Four weeks earlier, it was 181 cents - a 33% increase.

Diesel prices are moving even faster.

In the week to March 18, international prices rose sharply, particularly for refined diesel, according to the ACCC. The benchmark Singapore Gasoil price jumped 18% in a single week and is up about 109% over the past month.

The ACCC says the surge reflects tighter diesel supply and reduced availability of suitable Middle Eastern crude, compounded by ongoing shipping disruptions in the Strait of Hormuz.

Those costs haven't yet been fully captured in the CPI.

But as higher fuel prices work their way through transport, freight and supply chains, they are likely to push inflation higher in coming months, even as the official figures briefly suggest it's cooling.

Does higher inflation mean another rate hike?

Economists warn the timing could be awkward for borrowers.

NAB economists forecast headline inflation could spike to 4.6% in March. Some analysts say that if elevated oil prices are sustained, CPI could break above 5%.

The March inflation print lands just six days before the Reserve Bank's next cash rate decision.

All four major banks expect another rate hike in May. For a borrower with a $600,000 mortgage and 25 years remaining, that would add about $91 a month to repayments.

If that happens, it would mark three hikes across three meetings. Canstar analysis shows that would lift monthly repayments by $272 - a 7.4% increase in just four months, more than double Australia's current annual inflation rate over a far shorter period.

And May may not be the end. Markets are pricing in as many as five rate hikes this year, including the two already delivered.

How many rate hikes could you avoid by haggling?

The good news for borrowers is that not all of the pain is unavoidable.

Canstar analysis shows a typical owner-occupier who took out a loan five years ago and hasn't negotiated since could be sitting on a variable rate of around 6.78%.

On a $600,000 loan, knocking 0.5 percentage points off that rate would cut monthly repayments by about $188 - effectively wiping out the February and March rate hikes and saving more than $6000 in interest over the next two years.

While bargaining alone is unlikely to get borrowers below 5.75%, refinancing could. Canstar research suggests around 40 lenders are expected to offer at least one variable rate below that level, potentially saving a borrower up to $11,205 over two years, even after factoring in about $1150 in switching costs.

"The silver lining is that borrowers aren't powerless," says Tindall.

"Many Australians are on uncompetitive rates simply because they haven't picked up the phone. In today's environment, a 10-minute call could be worth thousands."

What happens next?

Koukoulas says higher petrol prices may eventually work to dampen inflation elsewhere.

"With a moderate lag of three to nine months, inflation pressures in non-oil sectors will be driven down as the petrol shock (combined with recent interest rate increases) squeezes cash flows and slows domestic demand," he says.

Krishna Bhimavarapu, APAC economist at State Street Investment Management, says markets are only beginning to price in the broader risks.

"Markets are clearly becoming more alert to the macro implications of the Iran conflict, and Australia is not immune," he says.

"A quick resolution would likely deliver only a brief inflation burst. A prolonged shock raises the risk that global demand slows enough to flirt with recession, which is not our base case."

"For now, the CPI print is encouraging," Bhimavarapu adds. "But with fuel prices rising sharply and housing and rent inflation still sticky, inflation firming over the coming months looks more likely than not."

Get stories like this in our newsletters.