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What does it mean for the RBA?
The quarterly CPI is one of the most-anticipated data releases produced by the Australian Bureau of Statistics (ABS) given its importance in determining the RBA’s monetary policy path. This week saw the release of March quarter data, which surprised markets and economists to the upside. The headline CPI rose by 1.0% in the quarter compared to market expectations of 0.8% and our forecast of 0.9%. Despite the stronger than expected result, annual inflation still slowed meaningfully, from 4.1% to 3.6%.
Perhaps more importantly though, the trimmed mean CPI, which is the RBA’s preferred measure of underlying inflation, also rose by 1.0% in the March quarter compared to market forecasts of 0.8% and our forecast of 0.9%. The slowing in the annual rate from 4.2% to 4.0% was more moderate than headline inflation, and a full percentage point above the top of the RBA’s target band. In terms of short-term momentum, both measures of inflation showed consumer price gains accelerated in the March quarter compared to the December quarter.
The rise in the quarterly rate of inflation was driven by large increases in health (2.8%) and education (5.9%), which reset annually and were in line with our expectations. The rise in education was the largest in over a decade, while the increase in health has moderated since last year. As in previous quarters, there were also strong gains in insurance and financial services prices (+2.0%), with particularly elevated and broad-based increases in insurance premiums as insurers pass on higher reinsurance costs and higher claims for natural disasters. Insurance prices are rising by 16%pa, and not yet showing signs of abating.
Also contributing significantly to inflation, though not a new story, has been the increasing cost of housing. With vacancy rates around historical lows, rental growth has been accelerating. For the March quarter, rents rose by 2.1% and by 7.8% in the last year. Excluding adjustments made to Commonwealth Rent Assistance, the annual rate is running at 9.5% and is yet to peak. New home prices also continue to rise by around 5% per year driven by solid growth in building and labour costs. The average time taken to build a new dwelling has blown out in the last year due to supply side constraints such as labour shortages and increased construction-sector bankruptcies. With demand remaining firm due to ongoing population growth, it is unlikely that new dwelling inflation will ease much in the near term.
On a somewhat brighter note, utilities inflation has been easing as electricity and gas prices have declined from a year ago. Gas prices have fallen by 2.3% in the last year as wholesale prices have moved below the government’s price caps that were implemented at the end of 2022. Electricity prices also fell in the March quarter, and wholesale prices have eased, but the annual rate of increase of 2% continues to be held down by State and Federal government subsidies. Without the Energy Bill Relief Fund rebates, electricity prices would be 17% higher over the year. The Australian Energy Regulator’s default market offer for 2024/25 suggests a small decrease in the reference rate of electricity prices from July. However, given that prices currently being paid are 15% below the reference rate, unless further government relief is announced in the May Budget, electricity prices paid by consumers will increase in July, not fall.
Some of the goods and services consumed by households are traded on global markets with their prices determined outside of Australia. Examples of tradables include fuel, clothing and footwear, furniture and household appliances. In the year to March, tradables inflation has fallen to less than 1%, with many of these goods experiencing deflation, that is, falling prices. The RBA is unable to influence the prices of traded goods and services, but those prices can still influence monetary policy decisions if the good or service feeds through to domestic industries. Here, the most likely candidate to impact monetary policy is fuel, which is an input to the transport industry and has broader impacts than just the cost to consumers of driving their motor vehicle. While fuel prices fell in the March quarter, in monthly terms, prices have been rising since January. We expect fuel prices to increase over the June quarter, removing some of the disinflationary impact from tradables.
In contrast to tradables, the prices of goods and services most influenced by domestic factors is reported by the ABS as non-tradables. Rents and new home purchases, education and insurance are all examples of non-tradables, and it is here that the domestic inflation problem is most obvious, with non-tradable inflation running at 5.0% in the March quarter. The monthly CPI shows that non-tradable inflation fell to 4.7% in January but has since increased to 5.2% in March. More progress on reducing non-tradable inflation will be needed before the RBA can consider easing monetary policy. We remain confident that evidence won’t arrive with the June quarter CPI which is released in July. In fact, we expect the annual headline inflation rate to remain at 3.6% in the June quarter, as non-tradable inflation remains robust and fuel prices tick up.
The September quarter CPI, released in late October, is likely to show a sharper moderation in annual inflation to 3.2%, including some easing of domestically generated inflationary pressures as the unemployment rate trends higher and wage growth eases. We remain of the view that the RBA will cut rates at the November Board meeting, based on the assessment that inflation will move within the target band by mid-2025, and lower interest rates will help to stimulate demand in order to retain the post-COVID labour market gains.