Australia’s headline inflation in the March quarter was 0.5%. Yearly inflation was 2.1%.
The figures were just shy of the forecast numbers, with economists predicting growth of 0.6% and 2.2% respectively.
The Australian dollar fell slightly on the news, slipping by more than 0.3% against the US dollar.
The underlying – or core – inflation reading (the average of the ABS’ trimmed mean and weighted median figures) matched analyst’s expectations. Core inflation rose by 0.5% during the quarter, leaving the increase on a year earlier at 1.8%. That’s up from an increase of 1.55% in the December quarter.
JP Morgan analyst Ben Jarman said the main drivers of headline inflation were temporary in nature, “with most inflation accounted for by oil, seasonality and administered pieces”.
“We see a genuine recovery in core inflation as a quite distant prospect, which biases the RBA to ease again”, Jarman said.
“The timing on that will be dictated by how long it takes for distractions from the housing market to subside, and also the acuteness of the pressure from the labour market.”
There were strong price gains for the quarter in education (+3.1%), health (+2.0%), and transport (+1.5) through the quarter. The rise in transport costs was driven by higher fuel prices, which rose by 5.7%.
These were offset by price falls in clothing and footwear (-1.4%), furnishings, household equipment and services (-1.0), and recreation and culture (-0.7%). The fall in clothing and footwear prices was reflected by softer retail sales, which unexpectedly fell in February.
This table from the ABS shows the movement in individual category across Australia’s capital cities, looking at both the quarterly and annual change.
The ABS again paid particular attention to vegetable prices, which rose by 13.1% for the year to the end of March.
“Adverse weather conditions in major growing areas over previous periods continue to impact supply for particular vegetables (potatoes, salad vegetables, cabbages and cauliflower). Offsetting these rises are price falls for capsicums and broccoli,” the ABS said.
The figures mean that headline inflation is growing at a faster pace than wages, which increased by 1.8% in the December quarter.
Analysts from UBS said that “today’s CPI should bring to an end debate about near-term rate cuts”.
Given that a move above 2% was expected anyway and headline inflation surprised slightly on the downside, the figures reflect the continuing headwinds to growth in the Australian economy as spending remains subdued.
AMP Capital economists Shane Oliver and Diana Mousina said that, “there are some near-term upward pressures to headline inflation over the next few months including higher electricity prices and the impacts of Cyclone Debbie in Queensland (which should only add around 0.2 percentage points to headline inflation)”.
“But, besides these disruptions, we still see underlying inflation remaining weak for some time”.
The core inflation figure is of more importance to financial markets given its relationship to movements in Australian interest rates.
Core inflation growth remains soft and broadly in line with the RBA’s expectations. At its last interest rate policy statement in early April, the RBA said that underlying inflation is unlikely to return to the bottom of its 2-3% target band until the middle of next year.
UBS said it expects core inflation to stay below the RBA’s target until the first half of next year.
The bank said that ongoing modest wage growth and a housing correction will see the RBA wait until at least the second half of 2018 to normalise interest rates.
Today’s inflation data reflects the competing forces at play with labour market slack, low wage growth and booming house prices. The next labour market data release will remain of central importance to analysts and policy makers.
The figures are unlikely to alter the consensus forecast for interest rate settings, which suggest that a change in interest rates this year is unlikely.
According to Oliver and Mousina, “our base case is that with inflation moving in the right direction and given the RBA’s increased emphasis on an inflated Sydney and Melbourne housing market and rising household debt the RBA is unlikely to make any adjustments to interest rates any time soon and we expect it to keep the cash rate at 1.50% for the next year at least”.
“However, low underlying inflation pressures mean that there is still more chance of a rate cut this year than a rate hike.”
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