Headline inflation has remained steady but the Reserve Bank’s preferred measure of consumer prices has fallen within the RBA’s target band for the first time in more than three years.
The Australian Bureau of Statistics March quarter data show headline inflation remained steady at an annual rate of 2.4 per cent, while the RBA’s preferred measure of “trimmed mean inflation” dropped from 3.3 to 2.9 per cent.
Economists surveyed by Reuters generally expected headline inflation to ease to 2.3 per cent for the 12 months to March, with the trimmed mean figure falling to 2.8 per cent — within the Reserve Bank’s 2-3 per cent target range.
Ahead of the data release, markets were pricing in the virtual certainty of a 0.25-percentage-point interest rate cut on May 20, with a slim chance of a larger cut at that RBA meeting.
The data show headline inflation increased by 0.9 per cent in the March quarter, which followed two quarters in a row of smaller 0.2 per cent rises.
That explains why the annual rate of headline inflation remained at 2.4 per cent in the March quarter — if inflation had been a little weaker in the March quarter, the annual rate would have declined a little.
However, with the trimmed mean measure of inflation falling to 2.9 per cent, which is back within the target band, economists say things are tracking as the RBA forecast.
“The RBA won’t pay much attention to the headline inflation rate, given that it remains distorted by myriad government subsidies and administered price changes,” Abhijit Surya from Capital Economics said.
“Overall, the big picture is that inflation is evolving broadly in line with the RBA’s expectations.
“If trimmed mean CPI keeps rising at the pace we’ve seen over the last couple of quarters, it should fall to 2.7 per cent by mid-year, in line with the Bank’s February projections.
“Given the ongoing tumult and financial market volatility, that should be enough for the RBA to cut rates by 25 basis points, to 3.85 per cent, in May,” he said.
The impact of electricity rebates on inflation in the March quarter
Callam Pickering, Asia-Pacific economist at Indeed, said the lift in headline inflation in the March quarter showed the impact of government electricity rebates on inflation.
He says the 0.9 per cent quarterly rise in inflation was quite large, but it was primarily due to a 16.3 per cent increase in electricity prices which occurred after many subsidies had worn off.
“In Queensland, most households have used up their $1,000 electricity rebate, which suppressed electricity prices in both the September and December quarters,” he said.
“The out-of-pocket spending on electricity in Queensland essentially quadrupled in the March quarter.
“Households in other states were also impacted to a lesser degree, with federal government energy subsidies also lower in the March quarter than in the December quarter.
“It’s a useful reminder of just how distorted Australia’s inflation figures are due to attempts to reduce cost-of-living pressures. And it’s also why it is so important to focus on underlying measures of inflation, which remove the impact of these subsidies,” he said.
To that end, Mr Pickering said it was significant that underlying inflation had fallen back within the RBA’s 2-3 per cent inflation band for the first time since the December quarter 2021.
“The RBA is going to cut rates when they meet in mid-May,” he said.
“That was likely true even if these inflation figures contained a nasty surprise. But there were no nasty surprises and key metrics, such as trimmed mean and service sector inflation, both improved.”
Treasurer welcomes the figures
Treasurer Jim Chalmers said he was very pleased to see headline inflation sitting in the bottom half of the RBA’s target band.
And he was “especially encouraged” to see trimmed mean underlying inflation back under 3 per cent.
“This is a powerful demonstration of the progress that Australians have made together in the economy,” he said.
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“This means both headline and underlying inflation is within the Reserve Bank’s target band for the first time since 2021.
“If you think about the economy that we inherited and the economy that we finished the term with, headline inflation was 6.1 per cent and rising, now it’s 2.4 per cent. Trimmed mean inflation was 4.9 per cent, it is now 2.9 per cent,” he said.
He said officials had also anticipated that inflation would be impacted in the March quarter by Queensland’s energy rebates coming off, but Wednesday’s numbers were still better than expected.
“These numbers are better than the budget assumed only five and a bit weeks ago, so we’re actually ahead of schedule compared to the forecast in the budget,” he said.
“They forecast [headline inflation] at 2.6 per cent and we’ve got 2.4 per cent today.
“The market has a very firm view that there are more interest rate cuts on the way, and I don’t see anything in these numbers that would substantially alter their expectations,” he said.
Gareth Aird, head of Australian economics at CBA, said the six-month annualised rate of underlying inflation dropped to 2.5 per cent in the March quarter, which means it’s sitting at the mid-point of the RBA’s target band.
He expects the RBA to cut interest rates a number of times this year, starting with 0.25 percentage points in May.
Services inflation lowest since June 2022
When dividing the data into “services” price inflation and “goods” price inflation, it reveals annual services inflation declined to 3.7 per cent in the March quarter, down from 4.3 per cent in December.
That was the lowest annual inflation for services since June 2022.
The decline in services inflation was driven by lower prices for rents and insurance.
Annual goods inflation picked up from 0.8 per cent to 1.3 per cent largely due to electricity prices increasing so much in the March quarter.
