Inflation was a bit higher than expected in the March quarter. It is declining, but it has a way to go for the RBA to be confident of returning to the 2–3% target range on the desired timetable. We expect the Board to keep rates on hold in May, and have pushed out the date of the first rate cut to November this year, previously September.
Inflation continued to unwind in the March quarter, but not quite as much as expected. Headline CPI and the key trimmed mean measure both printed at 1.0% in the quarter, against Westpac Economics’ expectation of 0.8% for both measures.
This brings headline inflation on a year-ended basis firmly into the 3s, in striking distance of the RBA’s 2–3% target range, but the key trimmed mean measure is still at 4%. The RBA does not publish a full quarterly profile for its inflation forecasts. However, based on its view for the year-ended to June quarter (3.3% year-ended for headline and 3.6% for trimmed mean), we assess today’s release as implying a somewhat slower trajectory of disinflation than the RBA would like. The RBA might also be sensitive to the lack of progress in disinflation through the March quarter evidenced in the monthly indicator.
Today’s release continues the general pattern of unwinding upstream pressures and soft domestic demand driving some parts of the inflation basket lower. Tradables inflation is back to pre-pandemic norms. Services inflation declined, but remains high. The overall shape of the outcome was qualitatively similar to our expectations, but there were a range of upside surprises in the detail.
The biggest surprises were not in areas that would suggest that inflation is being driven by strong demand. Car prices were up unexpectedly, consistent with the renewed increase in delivery times. Pharmaceutical prices and insurance costs are also not suggesting an inflation driven by consumer demand.
The main other upside surprise in the recent data flow has been the labour market, where unemployment has stayed a bit lower, and employment growth a bit stronger than earlier expected. While the Board is watching labour market developments closely, it is not trying to achieve the required disinflation primarily by weakening the labour market. Labour costs are elevated but they are not the main driver of the inflation surge.
Accordingly, we assess that the RBA will keep rates steady at its upcoming meeting. It will probably continue to be cautious about services inflation and domestic pressures broadly for a few months yet. We therefore do not expect any change to the messaging about not ruling anything in or out for another few months.
Given the slower progress on disinflation this quarter and the lower starting point for labour market slack, we now expect the first rate cut to occur after the November meeting, rather than September as previously expected. As always, this view is data-dependent and there are risks on both sides of a November timing.
