Unlike the US (which is monthly), Australian investors only get an update on inflation once a quarter.

And with households cashed up, consumer confidence soaring, property values booming and rates on hold at rock-bottom, local markets were on tenterhooks for the March CPI print “like viewers waiting for the next Game of Thrones instalment”, CBA said.

However, “rather than any bloodshed, it was a tepid CPI” result that came through yesterday.


CBA rates strategists Martin Whetton and Philip Brown provided some data analysis, after q/q headline inflation rose by 0.6pc — well short of expectations of a 0.9pc rise.

The trimmed mean measure (preferred by the RBA) of core inflation came in at just 0.3pc, which saw annual core inflation actually fall slightly (to 1.1pc).

“Noflation remains”, the pair said, with markets now facing an arduous three-month wait for the next GoT episode June quarter print, which could show a larger y/y increase off the low base in Q2 2020.

Upward pressures in March were led by the Transport category, including rising fuel costs and higher car prices on strong demand.

Housing inflation fell short of CBA’s forecasts, as government grants such as HomeBuilder helped keep a lid on cost pressures.

And the March CPI print may result in a “modestly lower yield structure” in Australian bond markets, said Whetton and Brown.

The starting point for inflation-based rate rises is “back to the lows for now”, with any changes based on financial stability risks from booming property markets also unlikely.

Looking ahead

In assessing where inflation — and by extension the rates outlook — goes from here, Whetton and Brown looked at zero coupon swap (ZCS) markets.

A zero coupon swap is an exchange of fixed payments for variable payments, where the variable payments are paid in regular instalments (like a normal swap) but the fixed payment is made in a lump sum at the end.

Central to the inflation outlook is the idea that the next few quarters will show larger annual base effects, given the pandemic year was so deflationary.

However, those changes are “immaterial” to ZCS markets because they’re entirely forward-looking, CBA said.

While today’s CPI print missed forecasts, the ZCS market is still pricing for inflation to get to 2pc “from now on out”, Whetton and Brown said.

That marks the lower end of the RBA’s 2-3pc target. And “given the current annual rate is only 1.1pc for the headline, that is a big change. But it’s not entirely unreasonable,” the pair said.

For example, despite yesterday’s miss, the last two quarterly prints have shown steady growth of 0.9pc and 0.6pc.

With most economic indicators rebounding strongly, annualised gains into the two per cent level are probably on the cards.

“For the moment our suspicion is that the demand-pull inflation pressures are building in the economy, and would have been more obvious in today’s print had it not been for government policy,” Whetton and Brown said.

However, they added that the market’s forecast may also reflect some embedded expectations bias around inflation growth, given the prevailing view of upside CPI risk.

In that context, while the market is priced for annual inflation to hit 2pc, it “might take slightly longer for CPI to actually get there”, CBA said.