The official measure of inflation has fallen for the second month in a row, easing pressure on the Reserve Bank of Australia (RBA) to hike interest rates next week.
On Wednesday morning, the Australian Bureau of Statistics' monthly consumer price index showed annual inflation of 6.8 per cent over the year to February, down from 7.4 per cent in January and a peak of 8.4 per cent in December.
The ABS said the most significant contributors to the annual increase in prices were housing (+9.9 per cent), food and non-alcoholic beverages (+8.0 per cent), transport (+5.6 per cent) and recreation and culture (+6.4 per cent).
However, the level of price increases in most of those categories had eased since the previous month.
For example, the annual increase in the cost of building a new house was at its lowest level since February last year, while travel and accommodation price increases had eased from summer holiday highs.
In mixed news for renters, rents were up an average 4.8 per cent over the past year, but that had not accelerated from the previous month's reading.
Another major cost for households, food, saw much stickier price increases.
"Prices for food and non-alcoholic beverages eased slightly, from an annual rise of 8.2 per cent in January to 8.0 per cent in February," said the ABS head of price statistics Michelle Marquardt.
"Meals out and takeaway food (+7.3 per cent) was the main contributor to the annual increase, followed by food products not elsewhere classified (+11.8 per cent), bread and cereal products (+12.5 per cent), and dairy and related products (+14.3 per cent)," she noted.
Small business struggling to recoup higher costs
It is no surprise that cafes and restaurants have been increasing prices, with eastern Melbourne cafe owner Ray Christy saying his business would be broke within three months if he did not pass on surging costs.
"When I've gone through our invoicing system and bookkeeping records. I'm finding that the average is about 30 per cent, and we've seen products that have risen as much as 300 per cent, he told ABC's The Business program.
"Passing the price rises (to customers) is the last resort. We've changed our menu prices a couple of times in the last few months but we're very reluctant to do that because, you know, you want to keep your regular customers. They'll just end up going somewhere else or, just perhaps, cut back on their spending.
"I've actually done the number-crunching. I found that, if I operate the way I am with no price rises, no changes, I'll be trading insolvent in three months. That's how bad it is."
Mr Christy, who has a full-time job in local government, said that has already had an effect on staffing levels, with he and his wife putting in more hours to save on wages costs.
"We've also had to cut back hours worked by our employees," he said.
"So, my wife and I, we're the operators of this business, so we have to spend more time here, so it's more labour-intensive for us.
"I do have a primary job, but I still will end up assisting my wife in the morning, in the afternoons, and on the weekend. So I would still spend 50, 60 to 70 hours a week running this business with my wife."
RBA will 'probably pause'
That is exactly the sort of effect the Reserve Bank has been aiming for, with its string of 10 consecutive rate rises intended to take some demand out of the economy, leading to a moderate rise in unemployment and keeping wages in check.
But there are signs that the effect is somewhat larger and faster than either it or most private sector economists had anticipated, prompting many to now forecast the RBA will take a breather from raising rates when it meets next week.
Economists had generally expected a fall in overall annual inflation, but a much smaller one to 7.1 per cent.
Capital Economics head of Asia-Pacific Marcel Thieliant said these numbers underlined that December marked the peak in inflation in Australia.
"The further sharp fall in inflation, coupled with the softness of consumption, will probably prompt the Reserve Bank of Australia to pause its tightening cycle next week, though we still expect one final rate hike at its May meeting," he wrote in a note to clients.
"Following unusually large gains at the end of large year, consumer prices have been rising less rapidly than their historical average in the first two months of 2023."
However, AMP senior economist Diana Mousina believes the Reserve Bank will not only pause next week, but be done with rate hikes altogether.
"We don't think that the average household with a mortgage of $600,000 can continue to pay the monthly repayments at a 3.6 per cent cash rate," she told ABC News Channel.
"We think that the more-neutral level of the cash rate — that won't put too much downside or upside pressure on the economy — is between 2.5 to 3 per cent.
"So, ultimately, we see the RBA actually cutting the cash rate at the end of this year, by 25 basis points, and early next year as well, so taking the cash rate back to around 3.1 per cent or so.
"We just don't think the current level of the cash rate is sustainable for Australia at this current point in the cycle."
On Tuesday afternoon, financial markets were pricing in a 92 per cent chance of rates being held at the RBA's next meeting.
Not all economists agree RBA will pause rate hikes
But senior economist with ANZ Research, Catherine Birch, said the bank is still forecasting the RBA will deliver two more increases to the cash rate, meaning it would reach 4.1 per cent in May.
Ms Birch said, despite Tuesday's data showing Australia had passed the peak of inflation, other economic indicators pointed to the need for another cash rate increase next week.
"We saw a strong labour market report, we saw a strong business survey from NAB, retail sales data was a little softer than we expected, but this monthly CPI coming in quite seasonally strong," she said.
"Combine that together and we think that the RBA will be going 25 basis points in April."
She said inflation still remains too high, which would suggest further rate increases are warranted to bring it under control.
"We expect another 25-basis-point hike in the cash rate in the April and the May meetings, which would take the cash rate to a terminal rate of 4.1 per cent," she said.
"We think that actually the RBA is going to need to hold at that restrictive level for quite some time, because there is such a gap between demand and supply at the moment in the Australian economy."
Ms Birch said, based on current forecasting, ANZ does not expect the Reserve Bank will begin to cut rates until November 2024.
