Consumer prices fall for first time since 2008, sharp inflation drop raises chances of surprise interest cut

Updated

An unexpectedly sharp fall in inflation has raised the chances of a surprise cut in interest rates at next week's Reserve Bank board meeting.

Figures released by the Bureau of Statistics data show consumer prices fell for the first time since December 2008, with deflation of 0.2 per cent in the March quarter.

Headline inflation over the year was just 1.3 per cent, well below market expectations of a 1.7 rise driven by 0.2 per cent quarterly increase.

The surprise result saw the Australian dollar tumble more than 1 cent to around 76.4 cents against the US dollar as economists said there was now a strong chance the Reserve Bank would cut interest rates at its meeting next Tuesday.

The RBA's preferred measure core of inflation — which strips out items such as fuel and fresh food — came in at just 0.15 per cent for the quarter and an annualised rate of a record low of 1.55 per cent, well below the target inflation band of 2 to 3 per cent.

It is only the second time in 15 years core inflation has fallen below the RBA's target.

Inflation number a 'game changer' for RBA

JP Morgan economist Sally Auld said the inflation number was a game changer for the RBA and she now expected a 25-basis-point cut in the official cash rate to 1.75 per cent next week.

"There is enough 'signal' — rather than noise — in the last couple of inflation prints to convince the RBA that the disinflationary trend is genuine, and moreover, has not stabilised," Ms Auld said.

Citi's Josh Williamson described the result as "a shocker" and said a rate cut on Tuesday was very much as 50:50 proposition.

Mr Williamson said it would now take at least another three quarters before inflation could return to the bottom of the RBA band.

"This may be longer than the Governor expected when he made the comment late last year that he was prepared to let underlying inflation move below the bottom of the target band for a period of time without becoming concerned," Mr Williamson noted.

The falls were broad based across 6 of the 11 key CPI groups, however biggest impact came from tumbling fuel prices, down 10 per cent for the quarter and fruit which fell 11.1 per cent.

Offsetting these volatile items were rises in the cost of secondary education up 4.6 per cent, pharmaceutical goods up 4.8 per cent and a 1.6 per cent lift in medical services.

AMP Capital's Shane Oliver said a combination of deflationary pressures globally, soft demand domestically and very weak wages growth inflation could remain well below target for an extended period.

"While we had virtually given up on a cut at its May meeting next week after recent solid jobs data, there is now a reasonable chance that it may move next Tuesday," Dr Oliver said.

Mining boom decline hits Perth

Inflation fell in six of the eight capital cities, tumbling 0.9 per cent in Darwin and 0.6 per cent in Perth over the quarter.

The decline in Perth follows a 2.2 per cent decline in home prices and a 2.3 per cent fall in rents as the effect of the end of the mining boom hits the demand for housing.

Falling domestic travel and accommodation prices had a big impact in Darwin.

Brisbane — which recorded a flat outcome — and Canberra, where the CPI rose by 0.2 per cent, were the only two cities not to experience deflation.

RBA 'can't ignore such a big undershoot'

Capital Economics' Paul Dales said the widespread weakness and the lower-than-expected figure was not due to overseas influences the RBA could ignore.

Non-tradeable inflation — which the RBA has some control over and covers sectors such as housing, utilities and services — dropped from 2.3 per cent to a six year low of 1.7 per cent.

"Whereas the RBA was previously thinking that low inflation would allow it to cut interest rates if demand faltered, it is now clear that low inflation itself is the problem," Mr Dales said.

"An inflation-targeting bank like the RBA can't ignore such a big undershoot of underlying inflation."

However, RBC's Su-Lin Ong noted the RBA may well treat the unusually low print with some caution.

"Coupled with mixed activity and labour market data this is likely to keep them on the sidelines next week but the easing bias should be a little firmer," Ms Ong said.

But Ms Ong maintained the RBA was likely to make two more cuts before the end of the year, taking the cash rate down to a new record low of 1.5 per cent.

Topics: economic-trends, money-and-monetary-policy, australia

First posted