Australian inflation was stronger than expected in the March quarter, leading markets to price out expectations for an RBA rate cut this year. Quarterly inflation was 1% in both headline and core terms, increasing in pace from the previous quarter driven by rises in services prices. Annual inflation, however, is still slowing, retracing to the pace seen around late 2021/early 2022.
Consumer Price Index — Q1 | By the numbers 
- Headline CPI printed at 1% in the March quarter, above the 0.8% figure expected and up from 0.6% in Q4. Headline inflation fell from 4.1% to 3.6% at an annual rate (vs 3.5% expected).
- Underlying CPI averaged 1% in the first quarter compared to 0.8% in the previous quarter. The annual pace was slightly softer at 4% from 4.2%.
- The key measure of core inflation, the trimmed mean, came in at 1%q/q (vs 0.8% expected) from 0.8%q/q in the December quarter, with the pace easing from 4.2% to 4% in year-ended terms.
Consumer Price Index — Q1 | The details
Australian inflation came in firm relative to expectations in the March quarter, though annual inflation continued to slow. Headline CPI was 1% in the latest quarter, up from 0.6% in Q4, with the annual pace slowing from 4.1% to 3.6%, its lowest since the end of 2021. The uptick in quarterly inflation came as services prices (1.4%q/q) saw their strongest rise in a year (4.3%Y/Y); meanwhile, goods prices (0.5%q/q) saw only a moderate increase, cooling from 3.8% to 3.1% year-ended.
The faster pace of services inflation in Q1 was driven by large price rises for education (5.9%) - its strongest increase in 12 years - and health services (2.2%). Meanwhile, rents (2.1%) continued to rise at pace with vacancy rates across Australia very low. The ABS reported that rents are up 7.8% through the year, rising at their fastest since 2009, but excluding the effect of a Federal Government rebate scheme, the increase would have been even larger (9.5%).
Prices are rising broadly across the services basket, up on average by 4.9% over the past year. There is, however, one notable exception: holiday travel prices fell 6% in the quarter on reduced demand following the peak summer period, to be down 1.1% over the year on declines for domestic (4.7%) and international travel (-1.1%).
Disinflation in the goods category remains intact, though the speed continues to be slower in Australia than in other advanced economies. The goods that pushed up most on headline inflation in the March quarter were: new dwellings (1.1%), vegetables (6.9%) and pharmaceutical products (7.1%). At the other end of the scale, furniture prices fell sharply (-5.6%); government rebates drove declines in electricity prices (-1.7%); and fuel prices weakened (-1%).
Consumer Price Index — Q1 | Insights
The March quarter inflation outcomes were firmer than markets had expected but were closer to the RBA's forecasts from the February Statement on Monetary Policy, coming in slightly below on headline (3.6%Y/Y vs 3.7%Y/Y) and above on core (4%Y/Y vs 3.9%Y/Y). Overall, I don't think the report will have major implications from a policy perspective. Markets have moved to price out the one remaining RBA rate cut they had factored in for 2024, but the Board, in any case, had been very reluctant to endorse those expectations for easing at their meetings so far this year. Australian inflation is moving down from the peaks of late 2022, but as seen overseas (and now here), that can be a bumpy path. The focus of the Board will remain on the composition of inflation pressures between stickiness domestically (non-tradables 5%Y/Y) and the easing in price pressures from global factors (tradables 0.9%Y/Y). A higher-for-longer approach is the more likely course than any further rate hikes from the Board.
