Asia Economy

Australian consumer prices rise less than expected in first quarter

Key Points
  • Australian consumer prices rose by much less than expected in the first quarter partly due to government subsidies for home building, while a very tame reading for core inflation suggested monetary policy would stay super loose for a long time to come.
  • The consumer price index rose 0.6% in the March quarter from the prior three-month period, under market forecasts of a 0.9% gain. The annual pace picked up to 1.1%, from 0.9%, but again missed forecasts of 1.4%.
  • That also remained far below the Reserve Bank of Australia's target band of 2%-3%.
Shoppers are seen in the overpass separating David Jones men's store and Westfield during the Boxing Day sales on December 26, 2019 in Sydney, Australia.
Jenny Evans | Getty Images News | Getty Images

Australian consumer prices rose by much less than expected last quarter while core inflation increased by the weakest pace on record, signaling monetary policy could stay super loose for a long time to come.

The consumer price index rose 0.6% in the March quarter from the prior three-month period, undershooting market forecasts for a 0.9% rise.

The annual pace picked up to 1.1%, from 0.9%, but again missed forecasts of 1.4%, and remained far below the Reserve Bank of Australia's (RBA) target band of 2% to 3%.

A key measure of trimmed mean inflation rose a surprisingly low 0.3% in the quarter, while the annual pace, at 1.1%, was the weakest on record.

"The weakness in underlying inflation is consistent with our view that the RBA will announce a third A$100 billion round of asset purchases before long," said Marcel Thieliant, economist at Capital Economics.

It also "suggests that the financial markets have gone too far in pricing in nearly three rate hikes by end-2023," Thieliant added.

In response, the Australian dollar fell to a day's low of $0.7726 to be last at $0.7735 as investors pared back the probability of policy tightening.

To help blunt the economic shock from the coronavirus pandemic, the RBA last year slashed interest rates to a record low 0.1% and announced a yield curve control policy targetting three-year government bonds. Later in 2020, it announced a separate round of government bond buying programme worth A$100 and this year extended the plan by another A$100 billion.

The RBA has reiterated rates will remain at 0.1% until actual inflation jumps back within its 2% to 3% band, a goal that has remained elusive for the past five years.

The RBA's own projections show inflation undershooting its target until at least mid-2023.

Grants and schemes

The ABS said March quarter inflation was weak due to the "introduction, continuation and conclusion" of a number of government schemes and grants, resulting in price falls for new dwellings and tertiary education.

Price rises in tobacco and furnishings were partially offset by falls in rents, automotive fuel and utilities.

Non-tradable inflation, a useful gauge of domestic price pressures, rose by just 0.2% in the March quarter and 1.3% on an annual basis, the data showed.

"There is, quite simply, little in the way of domestic inflationary pressures," noted Callam Pickering, APAC economist at global job site Indeed.