Australia's March quarter inflation report is set to be published at 11:30am (AEST) today. After slowing to a 2-year low at the end of 2023, inflation is expected to have eased further through the first quarter to 3.5% year-on-year in headline terms and 3.9%Y/Y on a core basis. Material progress has been made in returning inflation towards the RBA's 2-3% target band; however, the Board only recently signalled the peak for interest rates and it has remained reluctant to discuss a timeline for easing policy. This, together with the significant reduction in rate cut expectations in the US, has seen markets reprice their 2024 profile for RBA easing to just one rate cut from the 2-3 anticipated at the start of the year.
A recap: Inflation slowed sharply into year-end
Key inflation outcomes surprised on the downside of estimates in the December quarter. Headline CPI was 0.6% in the quarter and 4.1% in annual terms, a 2-year low after declining from 5.4%. Core inflation as measured by the trimmed mean printed at 0.8% quarter-on-quarter, resulting in the annual rate retracing from 5.1% to 4.2%, its lowest since Q1 2022.
The decline in Australian inflation from its late 2022 peak has largely been driven by the easing of global shocks - namely the Covid pandemic and its associated supply disruptions and the war in Ukraine - that drove up goods and energy prices. These dynamics continued to filter through to Australia in the December quarter, while Black Friday discounting also contributed to slower inflation.
By contrast, inflationary pressures generated domestically - although easing - have remained more persistent. This is reflected in the elevated rate of inflation for services, which has been underpinned by components such as rents, insurance, household services and education.
Further progress is expected in the March quarter
Quarterly CPI is expected to print at 0.8% in headline terms, an outcome that would slow the annual pace from 4.1% to 3.5%. Trimmed mean CPI is forecast at 0.9% quarter-on-quarter, with the annual rate easing from 4.2% to 3.9%. The expected figure for headline inflation (3.5%Y/Y) is slightly below the RBA's forecast track (3.7%Y/Y) but the central bank's projection for core inflation (3.9%Y/Y) is line with the market.
As a guide, the 3-month change in the monthly CPI indicator often provides a reliable lead estimate for the quarterly inflation rate. For the 3 months to February, headline CPI was 0.5%, suggesting that, on this basis, there could be downside risks to the market forecasts.
However, markets are more wary about an upside surprise today. This is seemingly taking into account developments overseas where inflationary pressures have remained sticky in early 2024, most notably in the US. On the domestic front, government rebates on energy bills and rents have provided support for households, but there is uncertainty around what their relative effects will be in the March quarter and these are key unknowns heading into today's report. My forecast is for a 0.7% quarterly CPI figure (3.3%Y/Y) and 0.8% for the trimmed mean (3.8%Y/Y).
