Australian Core Inflation Accelerates Toward Central Bank Target

• Australian Core Inflation Accelerates Toward Central Bank Target

Australia’s annual core inflation accelerated last quarter to just shy of the bottom of the central bank’s target range, underscoring its decision to leave interest rates on hold. Slight misses in other inflation gauges pushed the currency a little lower.

Key Points

• Quarterly trimmed mean gauge rose 0.5%, matching estimates; annual trimmed mean advanced 1.9% vs forecast 1.8% (RBA aims for 2%-3%)
• Quarterly headline CPI rose 0.5% vs estimated 0.6%; annual gained 2.1% vs forecast 2.2% and returned to target for first time since 3Q 2014
• Aussie dollar bought 75.15 U.S. cents at 12:38 p.m. from 75.40 cents prior to report

Big Picture

Reserve Bank of Australia Governor Philip Lowe has signaled a willingness to tolerate weaker inflation, warning a rapid return to target implies interest-rate cuts that could further inflame east coast house prices. He said in minutes of this month’s policy meeting that the property and labor markets “warranted careful monitoring” — a departure for an inflation-targeting central bank.

Australia’s jobs market has remained subdued since the start of last year — aside from a full-time hiring bonanza in March that many economists are skeptical about — as unemployment lifted to 5.9 percent and underemployment remains high. That suggests plenty of slack and little likelihood of large wage increases and much faster inflation.

Economist Takeaways

“The rise in underlying inflation in the first quarter, coupled with the RBA’s financial stability concerns, dramatically reduces the chances of any further interest rate cuts,” said Paul Dales, chief economist for Australia at Capital Economics Ltd. “Today’s data suggest that underlying inflation is now at a level that the RBA will be willing to tolerate. As such, we are no longer expecting the RBA to cut interest rates further. That said, price pressures and economic growth are not strong enough to warrant interest rate hikes. ”

“To a greater degree the deflationary threat that was prevalent a year ago — not just in Australia but across the globe — is less of a concern,” said Savanth Sebastian, an economist at the securities unit of Commonwealth Bank of Australia. “It is pretty clear that inflation is not a threat to the domestic economy, meaning that the Reserve Bank can comfortably keep interest rates at exceptionally low levels over the medium term.”

“While inflation is still low, there is no room for complacency,” Sebastian added. “‘Non-tradable goods prices rose by 0.9 percent in the March quarter. These prices are more influenced by conditions in Australia.”

Other Details

• Quarterly weighted median gauge advanced 0.4% vs estimated 0.5%
• Annual weighted median gauge gained 1.7% vs forecast 1.8%
• Tradable goods prices, which are impacted by the currency and other international factors, fell 0.2% from the previous quarter and were up 1.3% from year earlier
• Non-tradables, which are affected by domestic variables like utilities prices, rose 0.9% from the prior quarter and climbed 2.6% from a year earlier
• The rebound in the oil price that helped drive up headline CPI was reflected in a 5.7% jump in automotive fuel in the first quarter; new dwellings purchases by owner-occupiers gained 1%
• Holiday travel and accommodation costs fell 3.8%; fruit prices dropped 6.7%