Australia’s inflation rate defied expectations and eased in February but economists warn the worst may be yet to come for small and medium businesses already under cost pressure.
The ABS reports the Consumer Price Index for last month dipped to 3.7 per cent, down from 3.8 per cent in January, which was slightly below market forecasts. The trimmed mean measure, which strips out volatile price swings and is closely watched by the Reserve Bank, held steady at 3.3 per cent.
Critically, the February figures represent a snapshot of the economy before the Middle East conflict began pushing global oil prices skywards. Forecasters now expect headline inflation to climb sharply.
Ben Thompson, CEO of Employment Hero, said the combination of persistent inflation and a strong labour market signalled little relief ahead for SME owners with loan repayments. “Inflation nudging down slightly isn’t a green light for rate cuts.”
Energy Rebate Expiry and Food Costs Squeeze SME Budgets
Digging deeper into the data, the ABS analysis revealed housing costs rose 7.2 per cent annually, driven in large part by a 37 per cent increase in electricity prices. That spike, however, requires context – it’s primarily the result of federal and state government energy rebates expiring rather than a 37 per cent jump in underlying energy costs. The ABS noted underlying electricity prices rose 4.9 per cent.
Even with that distinction, the practical impact on SMEs is real. Businesses are now responsible for energy bills that were previously subsidised. For hospitality, retail and manufacturing operators with significant electricity consumption, the change hits hard.
Food and non-alcoholic beverage prices rose 3.1 per cent annually, with beef and lamb up 13 per cent. For SMEs in food service, the cumulative pressure is building.
Transport offered some reprieve, with fuel prices down 7.2per cent in the year to February. But that data was captured before the Middle East conflict began disrupting global oil supply, making the relief almost certainly temporary.
Middle East Conflict Threatens to Push Inflation Past 5 per cent
The February CPI figures are already being treated as a baseline rather than a guide to what comes next. Westpac forecasts headline inflation could reach 5.5 per cent by mid-2026 as the conflict feeds through to energy and transport costs.
Treasurer Jim Chalmers warned the shock could rival the scale of the Global Financial Crisis and the COVID-19 pandemic, telling Business Council of Australia members Treasury’s early modelling may have underestimated the impact of higher energy prices, disrupted supply chains and weaker global growth.
For SME owners, the implication is that input costs across energy, freight and raw materials are likely to rise further before they stabilise. The March CPI data, due late next month, will be the first to capture the conflict’s direct impact on Australian prices and will give a clearer picture of what’s to come.
Wages Outpace Inflation in a Genuine Bright Spot
Despite the challenging outlook, Employment Hero data revealed a meaningful positive signal. “The labour market is holding strong,” said Thompson. “Our data shows hiring up 6.8 per cent year-on-year, one percentage point stronger than the same period last year, with wages up 5.4 per cent and outpacing CPI.”
For workers, that represents a period of real wage growth for the first time in several years and a tangible improvement in purchasing power after an extended stretch where pay packets failed to keep up with the cost of living.
For employers, the picture is more nuanced. Stronger wage growth signals a resilient economy, but it adds to the cost base at a time when energy, food and borrowing costs are all moving in the wrong direction. SME owners managing payroll budgets will need to factor in sustained wage pressure, particularly as the Fair Work Commission’s annual wage review approaches.
Borrowing costs must also be factored into budgets. The RBA has raised the cash rate twice in 2026, and the inflation outlook makes relief unlikely in the near term. “Workers are seeing real gains, which is a good thing, but the RBA is looking at that same picture and seeing an economy that’s still running too warm to justify easing,” said Thompson.. “People definitely can’t bank on rate cuts to ease the pressure.”
SMEs Are Using AI To Drive Productivity
Rather than sitting tight, Australian SMEs appear to be taking matters into their own hands. Employment Hero data shows AI-skilled job listings surged 13-fold since the fourth quarter of 2024. “75% of those aren’t for engineers or data scientists,” said Thompson. “They’re for customer service, marketing, healthcare and accounting. It is awesome to see Aussie SMEs investing in productivity like this.”
The shift reflects a pragmatic response to the current environment. With borrowing costs high, input prices rising and wages running ahead of inflation, productivity gains through technology represent one of the few levers SME owners can pull directly.
