The latest Consumer Price Index (CPI) data from the Australian Bureau of Statistics (ABS), released on 25 March 2026, came in slightly below market expectations. The trimmed mean measure, which strips out volatile price swings and is closely watched by the Reserve Bank of Australia (RBA), held steady at 3.3%. Energy, food and housing remain the biggest cost drivers, while fuel offered temporary relief before the Middle East conflict began pushing global oil prices higher.
Critically, the February figures represent a pre-conflict snapshot. With forecasters now expecting headline inflation to climb sharply, rate relief is off the table. Ben Thompson, CEO of Employment Hero, said the combination of a strong labour market and persistent inflation means SME owners should not count on interest rate cuts. He said businesses need to focus on what they can control, including productivity and workforce strategy, rather than waiting for external conditions to improve.
Energy Rebate Expiry and Food Costs Squeeze SME Budgets
The ABS data revealed housing costs rose 7.2% annually, driven in large part by a 37% increase in electricity prices. That figure, however, requires important context. The spike is primarily the result of federal and state government energy rebates expiring rather than a 37% jump in underlying energy costs. The ABS noted underlying electricity prices rose 4.9%.
Even with that distinction, the practical impact on SMEs is real. Businesses are now absorbing energy costs that were previously subsidised. For hospitality, retail and manufacturing operators with significant electricity consumption, the change flows directly to the bottom line.
Food and non-alcoholic beverages rose 3.1% annually, with beef and lamb prices climbing 13%. For SMEs in food service, or those simply managing staff amenity costs, the cumulative pressure is building.
Transport offered some reprieve, with fuel prices down 7.2% 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.
The Middle East Conflict Threatens to Push Inflation Past 5%
The February CPI figures are already being treated as a baseline rather than a guide to what comes next. Westpac chief economist Luci Ellis warned the data would be “overtaken by events,” with Westpac’s written analysis forecasting headline inflation could reach around 5.5% by mid-2026 as the conflict feeds through to energy and transport costs. Ellis’s public comments pointed to inflation reaching “around 5 per cent,” broadly consistent with the bank’s published forecast.
Treasurer Jim Chalmers, speaking at a Business Council of Australia dinner the night before the data release, warned that the economic impact of the conflict could rival the Global Financial Crisis (GFC) and COVID-19. He said Treasury’s initial modelling of the conflict’s impact now appeared “pretty conservative.”
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 in late April 2026, will be the first to capture the conflict’s direct impact on Australian prices and will give a clearer picture of the true trajectory.
Elevated Interest Rates Keep Pressure on Borrowing Costs
The RBA has raised the cash rate twice in 2026, and the inflation outlook makes easing unlikely in the near term.
With trimmed mean inflation still at 3.3%, well above the RBA’s 2-3% target band, there is limited room for monetary policy relief. Thompson said the strong labour market, with unemployment near historic lows, gives the RBA even less reason to cut. He said SME owners should plan their budgets on the assumption that borrowing costs will remain elevated for the foreseeable future.
That has direct consequences across the sector. Variable-rate business loans, commercial leases with CPI-linked rent reviews and equipment financing all become more expensive to service. For businesses that expanded or took on debt during the low-rate period, the sustained pressure is compressing margins at precisely the time other costs are accelerating.
Wages Outpace Inflation in a Genuine Bright Spot
Despite the challenging outlook, Employment Hero’s platform data reveals a meaningful positive signal. Hiring across Australian SMEs is up 6.8% year-on-year, and wages have grown 5.4%, comfortably outpacing the 3.7% CPI figure.
For workers, that represents real wage growth for the first time in several years, 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.
SMEs Invest in AI-Driven Productivity Rather Than Wait for Relief
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.
Notably, 75% of those roles sit in non-technical fields including customer service, marketing, healthcare and accounting. That pattern suggests SMEs are not simply hiring AI specialists. They are embedding AI capability across their operations to extract more output from existing teams.
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.
The March CPI data, due in late April 2026, will offer the first real measure of how the Middle East conflict is flowing through to domestic prices. SME owners navigating the months ahead will be well served by stress-testing budgets against the possibility of 5% or higher inflation and continuing to invest in the productivity measures that can absorb rising costs from both sides of the ledger.
The information in this article is current as at 25 March 2026 and is intended to be general in nature. It does not constitute financial, legal or business advice. Readers should seek independent professional advice relevant to their specific circumstances.
