The Australian dollar declined following the release of today's inflation data from Australia. Many components of the report indicated a slowdown in CPI growth. Although quarterly data (to be released in April) will play the main role in shaping the Reserve Bank of Australia's policy, traders reacted negatively to today's release. However, the data has limitations.
In monthly terms, headline CPI for February slowed to 0.0% after rising by 0.4% in the previous month. This marks the second consecutive month of declining momentum. In annual terms, the headline CPI had been at 3.8% for the previous two months, and most analysts expected the same reading for February. However, the indicator unexpectedly slowed to 3.7%.
The core inflation measure (trimmed mean) also came out in the "red zone." On a monthly basis, it slowed to 0.2% (after 0.3% in January), and in annual terms it eased to 3.4% following two months of consecutive growth.
As we can see, key inflation indicators slowed only slightly, but traders reacted to the very fact of the reversal, especially against the backdrop of rising annual indicators in previous months.
Even so, a closer look at the structure of the report suggests that it is too early for the Reserve Bank to celebrate victory over inflation.
The main factors behind February's CPI slowdown were fuel and travel-related services. Gasoline prices fell by 3.4%, while domestic travel and airfare costs dropped by 7.4%. This dynamic significantly affected the headline figures.
However, these are volatile categories that do not reflect the underlying trend. For example, the decline in the "Holiday travel and accommodation" category (which largely drove the February slowdown) is seasonal. After children returned to school following the winter holidays, demand for flights and hotels in Australia dropped sharply, and operators returned prices to standard levels by removing holiday markups. In general, February has traditionally been a period of price correction after peak demand in December and January—this year, the pullback was simply more pronounced.
As for the "Fuel" category, the situation is even clearer: the 3.4% decline in February does not reflect current conditions. In March, fuel prices have already risen significantly due to recent developments in the Middle East.
At the same time, the sharp seasonal decline in some volatile categories is masking persistent inflationary pressure in other sectors. Once the post-holiday price adjustment effect fades, inflation is likely to accelerate again, especially amid rising fuel costs.
The main contributors to inflation growth in February were "Housing" (+7.2%) and "Food" (+3.1%). These categories are likely to remain the key drivers of inflation in the foreseeable future, amid record migration and rising logistics costs.
In particular, strong pressure on the rental market is being driven by large-scale migration to Australia. According to the latest data, the country has recorded a record number of temporary residents (around 2.9–3 million), which is roughly 10% of the population. Despite government efforts to tighten migration policy, the level remains the highest on record. This puts pressure on infrastructure, housing, and the rental market. Vacancy rates nationwide remain below 2%. Therefore, the "housing/rent" category is likely to continue making a significant contribution to inflationary pressure.
The same applies to "Food." As is well known, food prices in Australia are highly sensitive to diesel prices (due to the need to transport goods between states), so the March rise in oil prices will inevitably feed through into supermarket prices.
In other words, today's inflation report does not rule out the possibility of a rate hike by the Reserve Bank of Australia at its May meeting. First, despite the slight slowdown in February CPI, the average monthly growth rate for the quarter will likely exceed the central bank's target. Second, the February slowdown was driven primarily by seasonal travel price declines and a temporary drop in fuel prices. Third, the report only covers February, while the Middle East conflict and the subsequent energy shock emerged in March.
Thus, today's release is unlikely to become a catalyst for sustained pressure on the Australian dollar. This suggests that downward moves may still be used as opportunities to open long positions, with upside targets at 0.7000 (the middle line of Bollinger Bands on the H4 timeframe) and 0.7030 (the Tenkan-sen line on the daily timeframe).
