CPI eased to 3.7% in February. Here Is What to Buy and Avoid Before the RBA Meets in May.

CPI Eased, but Risks Remain

Australia’s inflation number just came in slightly better than expected, and markets briefly cheered. But we think investors are celebrating the wrong thing. The February CPI reading of 3.7% tells you what prices looked like before the world changed. It does not tell you where inflation is heading next, and that gap matters a lot right now. Here is the key thing to understand. The data was collected almost entirely before the Iran conflict began on February 28. The oil price surge that followed, which sent crude as high as US$120 a barrel in early March before settling back into the triple digits, is simply not in these numbers. The February print is already out of date before the ink has dried.

What are the Best ASX Stocks to invest in right now?

Check our buy/sell tips

Why the 3.7% CPI Print Should Not Fool You

The main reason inflation eased in February was falling fuel prices. Automotive fuel dropped sharply over the year and fell further in the month of February itself, acting as a big drag on the overall number. Take fuel out of the picture, and inflation looks considerably stickier.

That fuel tailwind will not repeat in March. In fact, it will reverse. Higher petrol prices are already flowing through to everyday Australians at the bowser, and that will show up clearly when the ABS releases the March CPI on April 29. We believe that reading will look noticeably worse than what we saw today.

The underlying inflation measure, known as the trimmed mean, reinforces this concern. It has barely moved in months, sitting well above the RBA’s 2 to 3% target band. That tells us the core inflation problem has not been solved. It has just been masked by cheaper fuel, and that mask is now coming off.

With the RBA already having raised the cash rate to 4.10% in March, another hike on May 5 is a genuine possibility rather than a tail risk. Investors who are not positioning for that outcome may be caught off guard.

What to Buy Before the RBA Meets in May

Banks are the clearest winners if the RBA tightens again. When rates rise, lenders earn more on the gap between what they charge borrowers and what they pay depositors. That directly supports earnings in the near term. Markets are already pricing in a better than even chance of a hike, with ASX Cash Rate Futures pointing to a 55% probability of a move at the May meeting. CBA, Westpac and ANZ are the obvious names to consider here.

Gold stocks are also worth watching. Gold tends to do well when inflation is running hot and global uncertainty is elevated, which perfectly describes the current environment. Australian producers with low costs and strong balance sheets are better placed than early-stage explorers right now.

What to Reduce or Avoid If Rates Rise Again

REITs look increasingly uncomfortable in this environment. Rising rates push up borrowing costs and pressure property valuations, which squeezes the distributions that REIT investors rely on. In our view, this is not the moment to be adding to REIT positions.

High-multiple tech and growth stocks face a similar headache. When rates rise, future earnings become worth less today, which compresses the valuations these stocks depend on. If the RBA hikes in May, expect further pressure on ASX software and technology names still trading at premium multiples.

The February CPI looks reassuring on the surface. But April 29 is the date that will shape everything. Watch that March reading closely, because it is likely to change the conversation entirely before the RBA sits down on May 5.