Australian inflation was surprisingly tame last quarter showing a moderation that greatly lessened the pressure for a hike in interest rates this year and sent the local dollar sharply lower.
A key measure of underlying inflation rose by only 0.5 percent in the first quarter and 2.6 percent for the year, well below forecasts of 0.7 percent and 2.9 percent respectively.
That was a big relief following a high reading the previous quarter and supported the Reserve Bank of Australia’s (RBA) confidence that inflation would stay consistent with its long-term target of 2 to 3 percent.
“The coast is relatively clear on the inflation front for the RBA to keep rates low,” said Ben Jarman, and economist at JPMorgan. “On the inflation front itself, things look relatively benign still.” Investors reacted by paring back the risk of a hike in the 2.5 percent cash rate at least until very late in the year. That in turn knocked the Australian dollar down over half a US cent to $0.9303, though local yields still remain high by rich-world standards. The anxiously awaited report from the Australian Bureau of Statistics showed the headline consumer price index (CPI) rose 0.6 percent in the first quarter, from the previous quarter when it climbed 0.8 percent.
The annual pace did edge up to 2.9 percent, the highest since late 2011, but that was well below forecasts of 3.2 percent. The quarterly increase was driven in part by seasonal increases in some sectors such as healthcare, transport and school fees, and by a large hike in tobacco duties. Education costs have been one of the main drivers of inflation, climbing by 5.1 percent in the year to March. That was balanced by falls in the cost of clothing, furniture, holiday travel and car maintenance.
The RBA had argued the pickup in inflation seen last year was temporary and that sluggish wage growth would keep it consistent with the target band over time.
“That high Q4 reading just never fit with weak wage growth and rising unemployment,” said Michael Turner, a strategist at RBC Capital Markets.
“Today’s data show the underlying pulse of inflation is not that strong. Market prices ex-volatiles were actually flat in the quarter and inflation in services moderated.”
Resource from Myanmar First Bilingual Business Journal May 1,2014