Australia's key March quarter CPI outcomes surprised slightly to the upside of consensus, but today's report has kept pricing for an RBA rate cut in May well anchored. Although quarterly headline CPI ticked up from 0.2% to 0.9% (vs 0.8% expected) as government electricity rebates unwound, the annual rate held at 4-year lows of 2.4% (vs 2.3%). Meanwhile, a softening in the trimmed mean CPI from an upwardly revised 3.3% to 2.9% year-on-year (vs 2.8%) confirmed core inflation is now back inside the RBA's target band and at its slowest pace since late 2021.
Headline CPI in the March quarter rose to 0.9%, up from increases of 0.2% in each of the back two quarters of 2024. Government subsidies to reduce cost-of-living pressures started to wear off in the first quarter, pushing inflation higher.
Electricity prices were the key driver, measured to have risen by 16.3% in the quarter, after declining by more than 25% over the previous two quarters on the combined effects of federal and state government rebate schemes. Rises in health (2.9%q/q) and education costs (5.2%) reflecting seasonal factors also put upward pressure on inflation. The other key price increases were in groceries (1.2%) and fuel (1.9%), with rents also up (1.2%) following changes to the federal government's assistance scheme.
At the other end of the scale, weaker demand saw items including international holiday travel (-7.6%), furniture (-5.5%) and AV equipment (-1.2%) pushing down on inflation in Q1.
Away from the quarterly price movements, the key development was that price pressures across the core of the basket continue to ease. Trimmed mean or core inflation slowed from 3.3% to 2.9% year-on-year, a low since Q4 2021. In 6-month annualised terms, core inflation is sitting right on the midpoint of the RBA's target band at 2.5%, its softest run rate going back to Q3 2021.
To further back up an easing underlying inflation dynamic, services inflation - a key area of the CPI basket the RBA has been tracking - is also slowing. In the latest quarter, services inflation was 0.8% - a slight uptick from Q4 (0.7%) - but the annual pace fell from 4.3% to 3.7%, its slowest since Q2 2022.
