Australia's CPI inflation report for the March quarter is due from the ABS this morning (1130 AEST). With further disinflationary progress expected to have occurred in early 2025, markets go into today's report priced for a second 25bps rate cut for the easing cycle from the RBA at the next meeting on May 20, after the cut in February.
March quarter preview: Disinflationary progress to continue
Although government rebates on electricity bills are unwinding, disinflationary progress still likely continued in the March quarter. After consecutive increases of 0.2%, quarterly headline CPI is forecast to tick back up to 0.8% in Q1 (range: 0.7-0.9%); however, with a higher outcome in the base period falling out of the annual calculation, the year-on-year pace is expected to ease from 2.4% to 2.3%. Core or trimmed mean CPI is anticipated to firm from 0.5% to 0.6% quarter-on-quarter, but as with headline CPI, base effects see the consensus figure lower at 2.9% year-on-year from 3.2% last time out.
The main source of volatility in Q1's inflation outcomes is likely to be in electricity prices. Timing differences between when the various federal and state government rebates schemes have been applied in each state makes the movement in electricity prices in the quarter difficult to predict. Measured electricity prices rose by around 6% over January-February in the monthly CPI series; assuming that rate of increase held in March, electricity prices could rise in the order of 12% across the quarter.
Another area to watch is food prices after ex-Tropical Cyclone Alfred hit south east Queensland and Northern New South Wales in March. Both fruit and vegetable prices lifted by 3.3% in January, movements that were only partially reversed by declines in February. Meanwhile, new dwelling costs are also key, particularly for core inflation. Although modest, home building costs started showing declines over January-February.
A recap: Inflation ends 2024 at 3-year lows
A disinflationary impulse renewed by government subsidies saw both headline and core inflation end 2024 at their lowest rates in at least 3 years. Headline CPI was 0.2% in the December quarter and 2.4% year-on-year, down from 2.8% previously. Trimmed mean CPI was 0.5% in the quarter, coming in from 3.5% to 3.2% through the year. With annual inflation running either side of the top of the target band (2-3%), the RBA went on to cut rates early in the new year.
Government rebates on household electricity bills and lower fuel prices have been the key items that renewed the disinflation impulse, which had essentially stalled by the middle of last year. Additionally, new housing costs were also contributing less to headline inflation as developers had increased incentives following the effects of higher interest rates in weakening demand.
Although inflation in services categories has moderated it remains the major driver of inflation. Input cost pressures, including from labour costs, were a key cause of rising services inflation, with strong demand allowing firms to pass through those increases in higher prices. However, a weaker demand backdrop has seen many firms now having to absorb more of the increases in their input costs in profit margins.
