March quarter inflation came in at just 0.4%, which is less than the 0.7% rise that the consensus of economists had expected and left annual inflation at 2.5% which is right in the middle of the RBA’s 2-3% target range.
While health and education costs saw their normal March quarter seasonal surge and electricity costs rose another 2.4% (bringing their annual increase to a ridiculous 17.1%), this was more than offset by falls in prices for food, clothing, furnishings and household equipment, cars, electronic goods and holiday travel.
As a result underlying inflation is running at just 2.4% year on year according to the average of the RBA’s mean and median inflation measures and annual price increases in the market sector of the economy are running at just 1.3% year on year.
Quite clearly the strong $A is still playing a role in holding inflation down, but the weakness in prices for things like furniture and household appliances also tells us that underlying demand in the economy remains weak and that companies lack pricing power.
Over the past few weeks we have seen a softer tone to global economic data, sharp falls in commodity prices which will put more downwards pressure on Australia’s terms of trade and national income and mixed economic data in Australia.
While past interest rate cuts are getting some traction the economy remains vulnerable and in need of more support ahead of the slowdown in mining investment that will occur this year. The weaker than expected inflation readings for the March quarter tells us that inflation is not an issue and is certainly not a barrier to further easing. It should see the RBA act on its easing bias, and cut interest rates another 0.25%, hopefully at its May Board meeting.
Australian inflation remains benign
