Australia Q1 inflation slowdown disappoints
The strength in underlying in ation highlights that further disin ation from here will be frustratingly slow. The chances of a cut in interest rates coming in 2024 have slimmed."
Sean Langcake, Oxford Economics
Australian consumer price inflation slowed less than expected in the first quarter as service cost pressures stayed stubbornly high, a disappointing result for policymakers that led markets to abandon hopes for any rate cuts this year.
The Australian dollar duly jumped 0.6 per cent to $0.6522, while three-year bond futures tumbled 15 ticks to 96.00, the lowest this year.
Spooked markets even moved to price in a minimal chance - about 4 per cent - of a rate hike by August, while pricing out almost any bet of a rate cut this year. Total easing expected this year has been slashed to 3 basis points, down from 17 bps before.
Data from the Australian Bureau of Statistics yesterday showed the consumer price index (CPI) rose 1 per cent in the first quarter, above market forecasts of 0.8 per cent.
The annual pace of CPI inflation, however, slowed to 3.6 per cent from 4.1 per cent thanks to base effects, but again came in above forecasts for an easing to 3.5 per cent. For March alone, the CPI rose 3.5 per cent compared to the same month a year earlier, up from 3.4 per cent in February.
A closely watched measure of core inflation, the trimmed mean, rose 1 per cent in the first quarter, again above forecasts of 0.8 per cent. The annual pace slowed to 4 per cent, from 4.2 per cent.
"It's higher than we were expecting, higher than what the market was expecting and higher than what the RBA would be expecting, so that 1 per cent number will be something that they'll be alarmed about," said Madeline Dunk, an economist at ANZ that tipped for a first rate cut in November.
"I think the RBA will want to be seeing those services and non-tradables numbers decelerate in Q2 and if we don't see that there is a chance we see those rate cuts get pushed out to next year."
Westpac yesterday pushed out the expected timing of the first rate cut to November, from September previously, given the slower progress on disinflation and the still healthy labour market.
The Reserve Bank of Australia has left interest rates at 4.35 per cent for three straight meetings as confidence had grown that inflation was on track to ease back to its target band of 2-3 per cent in late 2025.
However, policymakers have been cautious in ruling out any moves on policy as the labour market remains tight. The central bank has raised rates by 425 basis points since May 2022 to tame runaway prices.
The March quarter report featured several unwanted milestones, including education fees, which rose at the fastest pace since 2012, rents recording the biggest rise in 15 years and insurance costs surging the most in 23 years.
The divergence between tradables and non-tradables is stark, with prices for non-tradable goods, influenced mostly by domestic demand, remaining high at 5.0 per cent, while tradables rose just 0.9 per cent from a year ago.
"The strength in underlying inflation highlights that further disinflation from here will be frustratingly slow," said Sean Langcake, head of macroeconomic forecasting for Oxford Economics Australia.
"The chances of a cut in interest rates coming in 2024 have slimmed."
Indeed, investors have slashed rate cut expectations globally as signs emerge that the last mile of getting inflation back to target may be bumpy. In the US, markets are seeing less than two rate cuts from the Federal Reserve by year end, a sea-change from about five reductions at the beginning of the year.