Australia CPI set to show sticky inflation in February, reinforcing hawkish RBA outlook
- Australia’s inflation is expected to remain steady, but upside risks are building.
- Middle East tensions reinforce expectations of further RBA tightening.
- The Australian Dollar trades near recent lows ahead of the inflation release.
The Australian Bureau of Statistics (ABS) will release the Consumer Price Index (CPI) for February on Wednesday at 00:30 GMT, with inflation expected to hold steady at 3.8% YoY and come in flat on a monthly basis. This release comes as the Reserve Bank of Australia (RBA) has already raised its key rate to 4.10%, highlighting concerns over persistent inflation. Policymakers remain focused on potential second-round effects, while markets increasingly anticipate another rate hike in the coming months.
Meanwhile, geopolitical developments are playing a growing role in inflation expectations. Escalating tensions in the Middle East and disruptions to energy supply routes are pushing Oil prices higher, which could soon feed into Australian inflation in the months ahead.
Ahead of the release, AUD/USD is pulling back on the day, trading near recent lows around 0.6960, as the US Dollar (USD) stabilizes following its recent decline.
What to expect from Australia’s inflation rate numbers?
February inflation data is expected to show broadly stable price pressures, but still above the RBA’s 2%-3% target range. Markets expect annual inflation to remain unchanged at 3.8% for a third consecutive month, while the monthly reading is seen falling to 0% after 0.4% in January. The RBA’s preferred inflation gauge, the Trimmed Mean CPI, is also expected to hold steady at 3.4% YoY.
However, these figures should be interpreted with caution. The February data does not yet fully reflect the recent surge in energy prices driven by the Middle East war and disruptions in the Strait of Hormuz.
According to Westpac, fuel prices actually declined during the period, partially masking underlying inflationary pressures. At the component level, housing-related costs such as rents and electricity continue to rise, alongside education and clothing prices, while lower fuel and travel costs help contain headline inflation.
Looking ahead, risks are clearly tilted to the upside. Westpac expects inflation to rise to around 4.6% YoY in the June quarter due to the energy shock. While the direct impact on core inflation is expected to be more limited, second-round effects via wages and inflation expectations remain a key concern.
In this context, markets continue to price in a hawkish bias from the RBA, with rising expectations of further rate hikes in the months ahead.
How could the Consumer Price Index report affect AUD/USD?
In this environment, an in-line inflation reading may have a limited impact on the Australian Dollar (AUD), as markets are already aware that energy-related inflation pressures are still in the pipeline.
However, a stronger-than-expected print, particularly in the Trimmed Mean CPI, would reinforce expectations of further RBA tightening and support the Aussie.
On the other hand, a downside surprise could weigh on the Australian Dollar in the short term. That said, losses may remain limited, as markets are already anticipating a pickup in inflation driven by energy costs.
More broadly, AUD/USD direction will depend not only on domestic data but also on global risk sentiment and geopolitical developments, which continue to shape both inflation expectations and the outlook for monetary policy.
From a technical perspective, in the 4-hour chart below, AUD/USD near-term bias is mildly bearish as the pair holds beneath a descending resistance trend line, with price also trading below the 100-period Simple Moving Average (SMA) at 0.7059. The SMA has started to edge lower, indicating sellers retain the upper hand after the recent correction from the 0.7187 area. The Relative Strength Index (RSI) around 40 shows momentum leaning to the downside but not yet in oversold territory, suggesting room for further pressure while keeping scope for intermittent rebounds.
Immediate support is seen around 0.6950, where the horizontal line coincides with the latest downswing, followed by a lower support level around the 0.6900 level if selling extends. On the topside, initial resistance emerges near the 0.7060 region in line with the 100-period SMA, which would need to be reclaimed to ease current downside pressure. A sustained move above that area would open the way toward the trend-line zone around 0.7068, while failure to clear it would keep focus on the 0.6950 and 0.6900 supports.
Inflation FAQs
Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.
The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.
Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.
Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it. Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.
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