Inflation creeps up but Reserve Bank to hold nerve

CONSUMER prices are expected to have inched up in the March quarter, mainly on the back of higher fuel and food costs, taking headline inflation into the Reserve Bank of Australia’s target band for the first time in years.

However, continuing softness in core inflation means the central bank will likely keep the cash rate steady for the rest of this year, economists say.

The Consumer Price Index ( CPI) set to be announced tomorrow is expected to have risen 0.6 per cent in the March quarter for an annual rate of 2.2 per cent, according to a survey of 12 economists.

Underlying inflation, which strips out the effects of volatile price movements, is forecast to have been 0.4 per cent in the quarter and 1.7 per cent over the year.

“While underlying drivers of inflation remain subdued, the March quarter will likely be boosted by a perfect storm of higher electricity, petrol and fresh fruit and vegetable prices,” Citi economist Paul Brennan said. Citi is forecasting a rise in the headline CPI of 0.7 per cent and a 0.5 per cent rise in underlying inflation.

The gains are expected to be partly offset by sizeable price declines in telecoms and seasonal price falls in clothing, ac- commodation and holiday travel costs.

Economists also expect the CPI figures to confirm the slowing consumer demand that has been apparent in recent muted retail sales data, indicating that margin pressure has intensified.

Still, the headline inflation rate is likely to lift to within the RBA’s target band of 2- 3 per cent for the first time since the September quarter of 2014.

However, underlying inflation will continue to be a drag, underpinned by soft wages growth and spare capacity in the labour market.

“Core inflation at 0.5 per cent quarter on quarter will confirm inflation pressures remain subdued, driven in part by soft wages growth which reflects ongoing spare capacity in the labour market,” National Australia Bank economist Tapas Strickland said.