Inflation eased to 3.7% in the 12 months to February 2026, down from 3.8% in January, marking the first decline since November. On the surface, it offered a moment of relief in Australia's cost-of-living pressures. But the reprieve was short-lived and illusory.
The February data captured only the early stage of a global energy crisis that would reshape the entire inflation outlook within weeks. The conflict in the Middle East has resulted in sharply higher fuel prices, which, if sustained, will add to inflation. By late March, petrol prices reached a record high average of $2.38 a litre, obliterating the modest gains the February figures suggested.
The composition of inflation reveals where the pressure remains embedded. Housing inflation accelerated for housing (7.3% versus 6.8%), with food and non-alcoholic drinks remaining steady at 3.1%. Housing costs have been the driving force, particularly electricity. Even as fuel prices fell 7.2% year-on-year in the February data, electricity surged 37% over the past year as government energy rebates expired.
The Reserve Bank's own preferred measure, the trimmed mean, held steady at 3.3%. Yet this figure masks what happened next. Consumer inflation expectations rose to 5.2% in March 2026 from 5.0% in February, marking the highest level since July 2023. Inflation expectations jumped to 6.9% in mid-March, increasing by 1.6 percentage points from February, as petrol prices spiked to a record high of $2.38 per litre, up by over 70 cents in a few weeks.
The timing creates a governance dilemma for the RBA. The board made its rate decision on 17 March, just as the crisis was deepening but before the full economic weight became apparent. The decision split the board: five members voted to increase the cash rate by 25 basis points to 4.10%, while four voted to leave it unchanged at 3.85%. This represented the first non-unanimous vote since July 2025, signalling genuine internal debate about the path forward.
Governor Michele Bullock acknowledged the central bank faces an extraordinarily difficult balance. The conflict has resulted in sharply higher fuel prices, and the Board judged there is a material risk that inflation will remain above target for longer than previously anticipated. The RBA's challenge is managing inflation without tipping the economy into recession. Earlier wage growth data suggests household spending remained resilient, but that resilience will be tested as petrol and transport costs flow through to other goods.
What comes next depends substantially on data the February CPI entirely missed. The surge in oil prices and disruption to shipping through the Strait of Hormuz occurred too late to feed into the February CPI print, meaning the current data understates inflation pressures building in the pipeline. The quarterly CPI for the March quarter, due in late April, will provide the RBA with far more relevant information before its May meeting. That report will capture several weeks of the energy shock.
The most direct way an energy price shock can impact Australia is through fuel prices, which could lift inflation in the short term. While the RBA is expected to look through any spike in petrol prices and continue to anticipate lifting the cash rate in May, if geopolitical concerns escalate and are prolonged, the balance of risks could shift.
The structural issue underlying Australia's inflation puzzle is that Australia imports roughly 90% of its liquid fuel, making any global oil shock immediately felt at local petrol pumps. This leaves Australian policymakers with limited tools. Interest rate rises remain the primary mechanism, yet raising rates to combat a supply shock risks dampening demand when the economy may already be slowing.
The February inflation data, released on 25 March, was therefore both accurate and obsolete. It captured a moment before the world changed. For households budgeting through 2026, the real concern lies not in what February showed, but in what May's data will reveal about the months that followed.
Links to Australian Bureau of Statistics CPI data, the RBA's monetary policy framework, and the ACCC's fuel price monitoring provide updated information on inflation and policy developments.