Rising profit margins turbo-charged Australia’s latest inflation figures – but something worse is just around the corner | Greg Jericho
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It is rare for economic data to be out of date the moment it is published – and yet that is the case with the February inflation figures out on Wednesday at 11.30am. By 11.31am they had been digested and ignored amid a flurry of “before the full impact of the Iran war” comments.
In February, annual inflation was 3.7%, down slightly from 3.8% in January, with underlying inflation unchanged at 3.3%.
Normally this would probably have had markets anticipating a rate rise in May, given it remains well above 3%, but that was already the case due to the governor of the Reserve Bank a couple weeks ago suggesting that “we don’t want to have a recession, but if it’s hard to get inflation down, then you know we’re going to have to deal with that possibility”
More worrying is how many more interest rates rises investors now anticipate.
On the day before the bombing of Iran, the market anticipated the cash rate rising to 4.1%. Even after the bombing, the market initially saw only bad news for the global economy and foolishly thought the RBA would be wary of raising rates.
But by 17 March, after the RBA governor and deputy made it very clear they wanted to raise rates, the market was pricing in at least two rate rises this year and a strong chance of the cash rate hitting 4.6% by Christmas.
After the March rate rise, as oil and petrol prices went ever higher, investors took the RBA at its word that regardless of what was causing inflation, the RBA would send the economy into a recession if need be.
For a brief moment late last week the market was fully pricing the cash rate going up to 4.85%, before calming down a bit. But there is still a better-than-even chance of it happening by the end of the year.
And this week’s inflation figures won’t dampen that belief too greatly.
Because we all know worse is on the way. Almost all of February did not include the impact of the Trump administration doing Israel’s bidding and firing missiles willy nilly at Tehran without any thought of what Iran might do in return.
Take petrol prices. In Sydney, unleaded petrol in February averaged around 166.0c/litre and yet by the end of the month prices were already at 189.9c/litre.
This is bad enough for most of us, but as the Antipoverty Centre has noted, for someone on jobseeker, the cost of fulfilling mutual obligations has just skyrocketed past their ability to pay given the truly meagre level of jobseeker. This is why the centre and now the Greens have written to Amanda Rishworth calling for mutual obligations to suspend such activities.
When you consider that in February petrol prices across the nation fell 3.4%, a 30% increase or more will have a huge impact on March’s overall figure:
On 3 February the RBA’s Statement on Monetary Policy forecast inflation in June this year would hit 4.2% and then decline to 3.6% by the end of the year.
Right now, the RBA (and the government) would take those results in a heartbeat. But everyone knows the June figures will be much higher, and the big worry is so too will be the December number. And everyone also knows it has nothing to do with there being too many wage rises or demand in the economy – it’s because of the supply shock from Iran.
The RBA’s belief that wage pressures from a “tight” labour market are driving inflation took another hit earlier this week when the December quarter enterprise bargaining agreement data was released. The average annual wage rises for agreements approved in the last three months of 2025 was 3.8% – lower than the 4.0% for agreements approved in the September quarter and lower than the 4.3% for agreements approved in the June quarter:
The 3.7% average in the December quarter for both private and public sector employees was the lowest since the middle of 2023. Hardly a sign of inflationary pressures.
But this was already known.
The most recent GDP figures revealed what was driving inflation (something we were able to estimate in February but can now confirm). In the last half of 2025 the impact of labour costs (mostly wages and superannuation) on annual inflation fell, while the impact of profits rose.
Almost all of the spike in inflation at the end of 2025 came from the increased profit margins:
At least the impact is not as large as it was in 2022 and 2023 when profits soared after Russia invaded Ukraine, causing oil, gas and fertiliser prices to spike.
Good thing nothing like that has happened recently … oh wait, I am being handed a note.
And so, we wait to see the damage in the March figures and know that regardless of the cause of inflation, the RBA is likely to blame workers – and they will hold to that view even if it means a recession.
• Greg Jericho is a Guardian columnist and chief economist at the Australia Institute
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