Australia inflation highest since 2014, but still underwhelms

Key Points
  • Australia's consumer price index rose 2.1 percent year-on-year in the first quarter of 2017, slightly lower than Reuters forecast of 2.2 percent.
  • Australian dollar dipped after data was released on Wednesday.

Australian consumer price inflation tiptoed atop 2 percent last quarter for the first time since 2014 as petrol, health care and education got more expensive, a hopeful sign that the danger of deflation had likely passed for this cycle.

Yet, key measures of core inflation stayed stubbornly short of the Reserve Bank of Australia's (RBA) 2 to 3 percent target band, implying there was scant pressure for a hike in interest rates anytime soon.

"Not a lot in this is going to rock the boat one way or the other," said Michael Blythe, chief economist at CBA.

"Inflation overall looks well contained, so the RBA will be happy with that. Equally, they'll be happy that headline inflation is back within the target band."

Shoppers walk past a retail store in Australia.
Brendon Thorne | Getty Images

The RBA's favored measures of underlying inflation ticked up to an annual pace of 1.8 percent in the first quarter, from 1.5 percent and in line with market expectations.

A soporific mix of record-low wage growth, fierce retail competition and a sharp slowdown in rents has restrained underlying inflation for several years, and looks like lasting for a while yet.

The RBA itself does not expect core inflation to top 2 percent until late 2018 and has repeatedly warned of the risks of trying to get it higher faster.

It is particularly concerned that further stimulus would only encourage more borrowing-fueled speculation in housing, inflaming prices in Sydney and Melbourne and adding to already dangerous levels of household debt.

There was some relief that the headline consumer price index (CPI) rose 0.5 percent in the quarter, to take the annual pace to its fastest since 2014 at 2.1 percent.

There should be an added lift coming from rising utility costs, as well as higher vegetable prices after Cyclone Debbie damaged crops in Queensland.

Yet, the pick-up in annual CPI inflation was largely due to an unusually weak result from the first quarter of last year dropping out of the calculation.

Indeed, analysts noted much of the increase in prices came from temporary or seasonal factors. Petrol alone jumped 5.7 percent in the quarter, while health and education costs rose as they usually do at the start of a year.

Excluding volatile items — fruit, vegetables and petrol — inflation ran at just 1.5 percent.