• In seasonally adjusted terms the CPI rose by 0.1 per cent. The CPI stands 2.5 per cent higher than a year ago.
• The Reserve Bank monitors three measures to derive the underlying inflation rate. The trimmed mean rose by 0.3 per cent in the March quarter (2.2 per cent annual); the weighted median rose by 0.5 per cent (2.6 per cent annual) and the CPI less volatile items rose by 0.4 per cent (2.4 per cent annual).
• The latest data keeps the door open to a rate cut should it become necessary. Financial markets see a 40 per cent chance of a rate cut. CommSec believes that the Reserve Bank will leave interest rates unchanged in May.
• The most significant price rises this quarter were for new dwelling purchase by owner-occupiers (+1.7 per cent), pharmaceutical products (+7.6 per cent), tertiary education (+6.5 per cent) and tobacco (+3.7 per cent). The most significant price falls this quarter were for international holiday travel and accommodation (-5.2 per cent), furniture (-6.8 per cent) and fruit (-7.0 per cent).
• Based on the index price numbers a raft of items are the cheapest in two decades, including men’s shoes; women’s shoes; major household appliances; food additives; and oils.

What does it all mean?

• It is clear that at present inflation is not an issue, meaning that rates can stay lower for longer. Underlying inflation is tracking smack in the middle of the Reserve Bank’s 2-3 per cent target band. Effectively the low inflation result ensures the Reserve Bank can maintain an easing bias and not feel an urgent need to shift to a more neutral stance in the next few months.
• Inflation rose by just 0.4 per cent in the March quarter and when seasonal factors are taken into account, inflation rose by an even more subdued 0.1 per cent. In addition it is likely that the producer price data released in early May will confirm that businesses continue to absorb costs in order to get consumers to spend. And given the ongoing strength of the dollar it is difficult to believe that inflation will be a problem over the coming year.
• In the latest result even imported inflation looks well contained with the tradables component posting a sizable 1.2 per cent quarterly decrease – a result that should provide the Reserve Bank with an additional level of comfort.
• Interestingly inflation varied substantially across the states. Consumer prices in Darwin rose by a staggering 1.7pct in the March quarter compared with the likes of Adelaide, Brisbane and Canberra which were virtually flat. Transport, healthcare and housing were the big drivers of the rise in prices in the Northern Territory.
• Not only was the headline inflation rate virtually flat, but the closely-watched underlying measures also recorded decidedly subdued readings. The average of the three key underlying inflation measures stands at 2.4 per cent. Importantly if the Reserve Bank was to cut interest rates it would be from a position of strength rather than weakness.
• And while the Reserve Bank will debate another rate cut at the May Board meeting, the recent improvement in the global economic outlook, rising share markets, healthy house prices and improving confidence levels is likely to provide policymakers with enough confidence to stay on the interest rate sidelines. Interest rates are already well below “normal” levels, and the central bank is unlikely to want rates to get shift rates even further away from normal unless conditions take a drastic turn for the worse. CommSec expects the Reserve Bank to keep interest rates on hold in May.

What do the figures show?

• The All Groups Consumer Price Index (CPI) rose by 0.1 per cent in seasonally adjusted terms in the March quarter. In original terms the CPI index rose by 0.4 per cent in the March quarter. The annual rate of inflation rose from 2.2 per cent in the December quarter to 2.5 per cent in the March quarter.
• Underlying measures of inflation were relatively subdued in the March quarter. The weighted median measure rose by 0.5 per cent in the quarter, with the annual rate rising from 2.3 per cent to 2.6 per cent. The trimmed mean measure rose by 0.3 per cent in the quarter with the annual rate easing from 2.3 per cent to 2.2 per cent.
  Prices of tradables fell by 1.2 per cent in the March quarter, with lower prices for furniture, fruit, audio, visual and computing equipment, garments for men and vegetables. The most significant offsetting rises in the tradable goods component were for pharmaceutical products, tobacco, automotive fuel, other non–durable household products and wine. The tradables component fell by 0.2 per cent over the year to December.
• Prices of non-tradables rose by 1.3 per cent in the March quarter. Price increases were recorded for new dwelling purchase by owner–occupiers, electricity and take away and fast foods. The most significant offsetting falls were for milk, water and sewerage, bread and beer. The annual rate of non-tradables inflation rose from 3.9 per cent to 4.2 per cent in the March quarter. Tradable goods are those items whose prices are largely determined on the world market. Non-tradable prices are more affected by domestic economic conditions.

What is the importance of the economic data?

• The Consumer Price Index (CPI) is regarded as Australia’s premier measure of inflation. The CPI is published quarterly and measures price changes for a ‘basket’ of goods and services that dominate expenditure of metropolitan households. The “All Groups” index is the main focus, but other inflation measures are also published such as so-called ‘underlying’ measures. These include measures that abstract from price changes in volatile price items such as fresh food and petrol.
• The Reserve Bank aims to keep the headline inflation rate between 2-3 per cent over an economic cycle. If inflation is high and expected to rise, the Reserve Bank may elect to raise interest rates in order to constrain price pressures. Conversely, if inflation is low and expected to remain low, the Reserve Bank may elect to cut interest rates if it believes the growth pace of the economy is in need of strengthening.

What are the implications for interest rates and investors?

• A raft of goods has become cheaper or more affordable over time such as cars, TVs, phones, and whitegoods like fridges. And the price of vehicles have once again fallen in the latest inflation reading. In part we can thank the stronger Aussie dollar for the fact that car affordability is the best since the 1970s. The standard of living of Australians has continued to improve, and we expect this will be translated into a gradual improvement in the pace of spending over the coming year.
• The Reserve Bank is the envy of central banks across the globe. In Australia, inflation is contained, unemployment is still low, the economy is growing close to a “normal” rate and there hasn’t been a recession for 21 years. In short, the Reserve Bank’s wall of worry is decidedly empty.

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