Australian inflationary pressures weakened further in the March quarter, increasing the odds the Reserve Bank of Australia (RBA) will cut official interest rates in the months ahead.

According to the Australian Bureau of Statistics (ABS), headline consumer price inflation (CPI) was unchanged in the three months to March, seeing the annual increase slow sharply to just 1.3%.

Markets had been expecting a quarterly increase of 0.2% and year-ended rate of 1.5%.

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“The [unchanged reading] was a result of price rises in a number of goods and services being fully offset by a number of price falls,” the ABS said. “This was consistent across most of the capital cities.”

The ABS said the most significant price rises during the quarter came from vegetables, secondary education and motor vehicles.

“Drought and adverse weather conditions continue to reduce the supply of a selection of fruits and vegetables,” it said.

Those gains were completely offset by a steep decline in automotive fuel prices which slumped by 8.7% from three months earlier. Prices for domestic and international holiday expenses also fell steeply during the quarter.

“Lower world oil prices at the end of 2018 saw automotive fuel prices fall 6.1% in January, before rising in February and March,” the ABS said. Those gains have since continued in the June quarter, pointing to rebound in these categories in the next CPI report.

Image courtesy ABS

By source of inflation, tradable prices slumped by 0.6% during the quarter, trimming the increase over the year to just 0.4%. Tradable prices are influenced by overseas factors. The weakness in the March quarter was largely driven by weaker fuel prices.

Non-tradable prices — those largely determined by domestic influences — rose by 0.3% during the quarter and by 1.8% over the year.

Non-tradable goods and services prices account for over 60% of the weighting in the ABS inflation basket.

Underlying inflation — ore more importance when it comes to the outlook for monetary policy settings from the RBA — rose by 0.19% during the quarter after seasonal adjustments, a result well below expectations for a larger increase of 0.4%.

It was the weakest quarterly increase on record, surpassing the previous record set in the March quarter of 2016. Back then, such was the weakness in core inflation, it was enough to prompt the RBA to cut rates not once but twice within the next three months.

The big quarterly undershoot saw the annual rate fall to just 1.42%, well below the bottom of the RBA’s 2-3% medium-term target.

Underlying inflation has now remained below the RBA’s target level for over three years.

Not only that, it is now clearly decelerating away from the RBA’s mandated level, increasing the odds the bank will cut Australia’s cash rate in the months ahead, potentially as soon as next month.

Image courtesy Business Insider Australia

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