Tim Hext: What February inflation data means in the context of Iran conflict

A month ago petrol was $1.75. Today it’s $2.45. So how relevant was today’s February monthly inflation print? Pendal’s head of government bond strategies TIM HEXT explains

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WHAT did we learn from today’s February monthly inflation print?

And what does it mean in the context of war in Iran?

Monthly headline Consumer Price Index data was flat compared to January. On an annual basis, prices have risen by 3.7% since February 2025 – slightly lower than expected.

On a trimmed-mean basis CPI rose 0.2% or 3.3% year on year.

Non-tradeable prices are up 5% year on year while tradeables only rose 1.3%.

The graph below shows year on year CPI between January and February:

Education was the main contributor – which isn’t surprising since February is when annual school and university fees rises are measured.

Overall, as the graph above shows, the rises were similar to last year despite falling wages and inflation.

Tertiary fees only rose by 2.2% (since they’re indexed), but no one told secondary private schools about lower inflation, as they again pushed prices up by 6.6%. Oh, to have such a captive client base.

Travel prices fell, but this is a usual post-school holiday move.

The only other bit of good news was new dwelling costs, which make up 7.5% of the CPI basket, only went up 0.1%. They are now 3.7% higher than a year ago, but the 0.4% a month pace of late last year has now moderated.

Excluding volatile electricity prices, housing inflation overall seems to be topping out nearer 4%. This is a bit high but not uncomfortably so.

Market response

The market barely budged on this number. Without the Middle East noise, it would have caused a small rally in rates, but everyone remains fixated on oil prices.

We have seen a bounce in rates since Monday and the market is now closer to two, not three, more hikes.

Inflation over March

Q1 2026 CPI (and March CPI) is released at the end of April, just before the next RBA meeting in early May. The March rate hike takes some pressure off the RBA to move in May.

Assuming the current $2.47 fuel price remains to month end it will see fuel prices up 28% in March. Should they stay there through April to June that would see fuel prices up 30% in Q2 over Q1. The news is even worse for diesel and jet fuel.

Fuel directly accounts for only 3.3% of CPI but clearly the costs feed indirectly across a wide number of goods and services.

Headline inflation in March is likely to hit nearly 4.4% on a year-on-year basis. This would mean headline inflation for Q1 is closer to 1.2% and trimmed mean around 0.9%.

Market pricing

These Q1 CPI numbers would lean towards another rate hike in May. However, there is so much going on before early May that current pricing of a slightly higher than 50% chance of a hike seems fair.

Ultimately it will be all about balancing the ‘stagnation’ and ‘inflation’ in stagflation.

In longer bonds we still view 5% as a good medium-term buy, although seeing levels briefly hit 5.2% on Monday did test our conviction. Volatility is here to stay.

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About Tim Hext and Pendal’s Income & Fixed Interest boutique

Tim Hext is a Pendal portfolio manager and head of government bond strategies in our Income and Fixed Interest team.

Tim has extensive experience in banking, financial markets and funding including senior positions with NSW Treasury Corporation (TCorp), Westpac Treasury, Commonwealth Bank of Australia, Deutsche Bank, Bain & Co and Swiss Bank Corporation.

Pendal’s Income and Fixed Interest boutique is one of the most experienced and well-regarded fixed income teams in Australia.

Find out more about Pendal’s fixed interest strategies here

About Pendal

Pendal is a global investment management business focused on delivering superior investment returns for our clients through active management.

In 2023, Pendal became part of Perpetual Limited (ASX:PPT), bringing together two of Australia’s most respected active asset management brands to create a global leader in multi-boutique asset management with autonomous, world-class investment capabilities and a growing leadership position in ESG.

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