Australian inflation just came in HOT

Australian inflation has come in hotter than expected, with prices in Q1 rising 0.2% while 0.1% was expected.

The core inflation number – which markets were watching most closely today – was 0.6% for the quarter and 2.35% for the year. Markets were expecting 2.25% for the year.

While these might seem like small differences, the inflation rate is a critical component of the current economic outlook in Australia, where the central bank cut interest rates to a record-low 2.25% in February.

The Reserve Bank of Australia aims to keep inflation between 2% and 3% through the economic cycle. The RBA surprised the market by not cutting rates further this month. The market expects another cut to come in May, but this data makes that somewhat less likely.

This chart shows the RBA’s target inflation band, along with the quarterly inflation data:

Falling global oil prices led to significant falls in the cost of fuel, which was down 12.2% for the quarter. Fruit was the other major category to fall, by 8%.

These were offset, however, by increases in the prices of domestic travel (up 3.5%) and third-level education (up 5.7%).

The Aussie dollar rallied 30 basis points on the news against the USD, while stocks fell after the data release.

The fall in fuel prices was “registered in all fuel types with the quarterly fall the largest since December 2008” the ABS said. It added that over “the twelve months to March 2015, automotive fuel has decreased by 22.5 per cent. This is the largest yearly fall in the history of the series, beginning in September 1973.”

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