Interest rate relief could come within weeks after a higher than expected inflation print still fell within the Reserve Bank’s target range.
Underlying inflation fell to 2.9 per cent in the year to March and headline inflation held steady at 2.4 per cent, paving the way for a Reserve Bank interest rate cut at its May meeting.
The trimmed mean, the RBA’s preferred inflation measure, grew 0.7 per cent in the March quarter, which pushed the annual figure below three per cent for the first time since 2021.
Headline inflation grew 0.9 per cent to reach 2.4 per cent on an annual basis for a second straight quarter, securely in the lower half of the central bank’s two to three per cent target range.
The main drivers of price rises for the quarter were housing (+1.7 per cent), education (+5.2 per cent) and food and non-alcoholic beverages (+1.2 per cent).
Annual services inflation, which had been sticky and a concern for the RBA, fell to 3.7 per cent from 4.3 per cent in the December quarter, Australian Bureau of Statistics acting head of prices statistics Leigh Merrington said.
“This is the lowest annual outcome for services inflation since the June 2022 quarter, reflecting easing inflation across a broad range of services, including rents and insurance,” he said.
While the headline and underlying inflation figures were slightly higher than consensus forecasts, economists and market analysts still tip the Reserve Bank to cut interest rates next month.
“Australia’s quarterly inflation data were marginally stronger than expected, but (they) shouldn’t move the needle for the RBA which, in our view, remains on track to ease policy by 25 basis points in May,” JP Morgan chief investment strategist Tom Kennedy said.
Treasurer Jim Chalmers pounced on the figures to pitch for a second Labor term ahead of Saturday’s federal election.
“If you think about the economy that we inherited … headline inflation was 6.1 per cent and rising, now 2.4 (per cent), trimmed mean inflation was 4.9 per cent, it is now 2.9 per cent,” Dr Chalmers told reporters.
“Labor is delivering lower inflation, lower taxes, higher wages, immediate and ongoing help with the cost of living.”
While Australia’s economy had turned a corner, economic growth remained sluggish against a backdrop of global uncertainty and US-China trade tensions, Deloitte Access Economics head Pradeep Philip said.
“A May rate cut should not be viewed as the RBA declaring ‘mission accomplished’ in the fight against inflation,” he said.
“Instead, it should be viewed as insurance against any collateral damage a trade war and geopolitical turbulence may cause the Australian economy.”
The impact of rising tensions between China and the US remained unclear, with potential large-scale stimulus from Beijing likely to support exports and prices, while any related supply chain disruptions would also be inflationary.
On the flip-side, Chinese products previously bound for the US could become cheaper as they find new markets.
“This would bring down inflation, making it easier for the RBA to cut rates further to improve confidence amid global uncertainty,” Mr Philip said.
In its most recent minutes, the RBA flagged that its May meeting would be an “opportune time” to revisit its monetary policy setting.
Economists at CBA, ANZ and Westpac expect a 25 basis point rate cut in May, which would bring the cash interest rate down to 3.85 per cent.
“We view an RBA rate cut of 25 basis points in May as a near certainty, given the downside risks to global and domestic growth stemming from global trade policy uncertainty and the inflation outcomes over the past two quarters,” ANZ economist Adelaide Timbrell said.
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