The March quarter inflation release came in hotter than anticipated. Quarter-on-quarter headline inflation increased from 0.6% in the fourth quarter of 2023 to 1.0% in the first quarter of this year, above expectations of 0.8%.
Although annual inflation declined from 4.1% to 3.6%, it also was above estimates of 3.4%.
The RBA’s preferred underlying measure (trimmed mean CPI) also surpassed consensus estimates. The quarter-on-quarter metric increased from 0.8% in the December quarter to 1.0%, versus expectations it would remain at 0.8%. Meanwhile, annual trimmed mean inflation eased from 4.2% to 4.0% but surpassed consensus of 3.8%.
The RBA’s minutes from its March meeting had noted that inflation outcomes had been coming in “broadly as expected”. These data challenge that assertion and suggest the RBA will have to remain hawkish for some time. While year-on-year inflation is slowing due to base effects, it is nowhere near as fast or deep enough for the RBA to begin an easing cycle anytime soon. Similar to recent US data, the underlying strength of the economy brings into focus whether any cuts are likely at all in 2024.
Home Grown Inflation
The details of the latest inflation report send a worrying signal for the RBA. While inflation of tradable goods (more globally driven) continued to decline, moderating to 0.9% year-on-year, non-tradables inflation – a better indicator of domestic underlying inflationary pressures – remained stubbornly sticky at 1.5% for the quarter and 5% year-on-year. Similarly, goods rose only 0.5% and 3.1% year-on-year; but services (driven more by domestic labour costs) remained elevated at 1.4%, and 4.3% year-on-year.
The biggest category drivers of quarterly inflation include education (up 5.9%), health (up 2.8%), insurance (up 2.0%) and housing (up 0.7%). Education fees increased with the start of the calendar year, showing the strongest quarterly rise since 2012, albeit partly reflecting a one-off boost based on prior policy decisions. The strong increase in housing was largely due to continued undersupply in the rental market, where prices rose 2.1% over the quarter. Due to low vacancy rates and a tight housing market, annual rent prices remain near 20-year highs.
The RBA’s concerns over the lingering high rates of growth in services prices, and the concentration of price pressures on the non-tradables side of the economy haven’t gone away. It is reasonable to expect that progress in this space will be a focus for the RBA particularly given what the Fed is experiencing in the US with recent inflation trends. Overall, the data clearly indicates that domestically sourced price pressures remain stubborn.
Overall, inflation continues to moderate year-on-year, but headline CPI remains stuck above the RBA’s target band of 2.0-3.0%, while ‘core’ is still very sticky. On the downside there is encouraging data from NAB business survey trends which showed falls in labour costs, purchase costs and buying and selling prices. Domestic private demand has been flat in recent quarters, slower consumer spending should help ease non-tradables/services driven inflation; the RBA will be monitoring wage outcomes this year very closely.
However, additional fiscal stimulus (~1% of nominal GDP) including upcoming tax cuts and a continuation in cost of living support measures in the May 14th Federal Budget will add to demand while also putting downward pressure on inflation in key sectors, such as rents, utilities and childcare. Regulated wage increases for the minimum/award wage are also set to lift by ~4% in July. This will see the RBA continue to exercise caution, particularly if the labour market remains tight.
Goodbye to 2024 Rate Cuts?
Prior to the data release, the market had already significantly wound back expectations, with the timing for the first RBA cash rate cut pushed from November 2024 to February 2025. This move came after stronger than expected US inflation figures earlier in the month, raised fears that local prices could also remain stickier.
The hotter than expected quarterly release then saw the interest rate market completely erase the chance of any easing by December, from 70% implied before the CPI release. 10-year bond yields rose 15 basis points to 4.54% as the market wound back expectations of RBA easing over the next couple of years. The A$ rose from 0.6485 to 0.6530.
The market has drastically shifted the timing of the first “fully priced” RBA rate cut from February to August 2025, leaving Australia as the only major economy, apart from Japan, priced with a chance of a rate increase this year. With the economy growing at a below trend pace this seems an overly hawkish expectation but inflation will need to show a clearer down trend in the next few quarters for the RBA to consider easing policy.
On the Narrow Path
While the market's anticipation of the first 25bps cash rate cut being delayed until August 2025 might seem unlikely, we have adjusted our outlook from expecting the easing cycle to begin in the back-end of this year to early 2025.
We still see a relatively slow easing cycle of 25bps per quarter, and see the cash rate as bottoming out 75-100 basis points below current levels. More broadly we expect Australia to lag other central banks in terms of timing and magnitude. All things being equal, this should ultimately be positive for the A$ (on a 6- to 12-month view). The local share-market has been aided by the prospect of easier policy later this year. The interest rate market's hawkish shift suggests a less positive outlook for domestic earnings at the margin. However, the July 1 tax cuts remain a source of significant support for the consumer, albeit a complicating factor for the RBA.
The RBA cash rate has been on hold at 4.35% since November last year, but the strength in underlying inflation highlights that a return to the RBA’s 2.0-3.0% inflation target won’t be easy implying the RBA will have to remain hawkish for some time. The quarterly disinflation trend has proved somewhat volatile over the past year albeit on balance it has been an unconvincing downswing.
A lower cash rate is still possible at the back end of this year however, the RBA will need to see the services and non-tradables numbers decelerate in both the second and third quarter, to gain confidence inflation is moving towards their 2.0%-3.0% target.
| 2022 peak headline inflation |
March 2024 headline inflation |
Timing of first cut (market implied) | |
| New Zealand | 7.3% | 4.0% | November 2024 |
| Australia | 7.8% | 3.6% | August 2025 |
| US | 9.1% | 3.5% | November 2024 |
| UK | 11.1% | 3.2% | September 2024 |
| Eurozone | 10.6% | 2.4% | July 2024 |
Source: Refinitiv, Wilsons Advisory.
Written by
David Cassidy, Head of Investment Strategy
David is one of Australia’s leading investment strategists.
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