The Consumer Price Index (CPI) for the March quarter was released on Wednesday.
Headline CPI increase by 0.9% for the quarter, while on an annual basis rose by 2.4% over the twelve months to March 2025. Remaining in line with the previous quarter.
The quarterly rise in headline CPI was the largest increase since Q3 2023. 0.9% qq was slightly above market expectations of 0.8% qq, albeit it was in line with the RBA’s most recent forecast.
The trimmed mean measure (the RBA’s preferred measure of inflation) dropped to 2.9% yy. The quarterly figures came in slightly higher than market consensus, at 0.7% qq against a consensus of 0.6% qq. This will still likely be enough for the RBA to cut rates at the upcoming May 20 board meeting.
The primary contributors to the quarterly CPI growth were housing (+1.7%), education (+5.2%), and food and non-alcoholic beverages (+1.2%).
Food prices rose 3.2% over the 12 months to the March quarter, up from 3.0% in the December quarter. Meat and seafood had the largest annual increase since December 2022 at 4.3% yy, while fruit and vegetable prices also remain elevated at 6.6% yy.
Partially offsetting these increases were declines in recreation and culture (-1.6%) and furnishings, household equipment and services (-0.9%), which moderated the overall upward movement in the index.
This data highlights persistent inflationary pressures in core categories, despite softness in discretionary spending sectors.
We continue to see inflation running above target across a fairly broad range of categories. Services inflation continues to drive much of the increase. We have seen it moderate this quarter, however, with the key rents and insurance categories slowing considerably.
There is evidence to suggest that across both the US and Australia Q1 CPI tends to land above consensus, with inflation moderating throughout the year. While this should be captured by seasonal adjustments, there is evidence that these effects are not fully represented. Services like education, health care, and insurance in particular see large price rises at the start of the year, as businesses reset pricing for the new year.
May Rate Cut Almost Inevitable
The chance of a May rate cut is all but baked into the price by the money market, although the jumbo-sized 50 basis point cut that some market commentators were predicting is looking very unlikely.
The money market was pricing for almost 5 rate cuts through 2025 (121 basis points) prior to the release. However, with figures coming in higher than expected, this was pared back to 115 basis points after the release. We believe that this is still too bullish, and that the market is overambitious with regards to the pace of rate cuts. We think that a more sensible expectation would be two further cuts after the May meeting. The live meetings will likely be the meetings in August and November, following the release of quarterly inflation reads. This would take the cash rate down to 3.35% by year end.
Cost of living pain still bites
Consumers will certainly be welcoming further rate cuts now CPI is in the RBA’s target band. However, the cost-of-living crisis is still a major concern. Prices are still rising at a solid pace. Given that inflation was running in the 7-8% range through 2022/2023, the cumulative gap between CPI and real wages remains significant. It will likely take some time for wages to catch up to inflation and for consumers to feel genuine cost of living relief.
Australian Idle
The labour market continues to show resilience, with tightness in the market loosening, albeit very gradually. The unemployment level for the March quarter is sitting around 4.1%, although growth in employment slowed through the quarter. The Australian economy is in relatively positive shape compared to global counterparts. However, the downside risk of weak global growth spilling over to Australia may now be a concern for the RBA.
Post the April 2 liberation day tariffs announced by President Trump, the IMF forecast significant downgrades to global economic growth. Indeed, Australian GDP is expected to only grow 1.6% over 2025.
We believe the IMF forecast may be too bearish, and see at least 2% over 2025 as more reasonable. There will be a raft of stimulatory fiscal measures following the Federal Election based on policies announced, as well as the evolving rate cut cycle. Global growth risks will still have an influence on overall growth, however.
This may prompt the RBA to take a cautious stance and hold rates at some of the upcoming meetings, at least until the government gets more information on the true cost of tariffs for global and domestic growth.
Australia appears to be in a far better state than the US, which is facing the threat of a renewed inflation pick up from President Trump’s tariff policy. There will be continued downside risks to US growth from economic uncertainty, as questions over Trump’s policy platform also continue to create uncertainty for businesses and consumers.
The US is a reasonably large trading partner with Australia. However, more consequential will be the impact of US tariffs on the Chinese economy and how Chinese policymakers react. China is Australia’s largest trading partner, and a slowdown in Chinese demand will impact domestic growth.
Local markets reacted positively to the CPI news on Wednesday, with the ASX200 continuing its rise and finishing up for the day. Bond yields fell to 4.13%.
Overall, although the CPI read came in slightly above market consensus, we believe that the fall in the annual trimmed mean figure will be enough to allow the RBA to cut by 25 basis points at the upcoming May meeting.
The ongoing resilience of the labour market and the stimulatory fiscal policies in the pipeline for this year will likely slow the pace of cuts moving forward. We maintain our view of a further 3 rate cuts for the year (including May), with the possibility of a further cut in 2026 for a cumulative 125 basis points in cuts for the cycle. There will need to be a meaningful increase in real wages to combat cost of living pressures.
We maintain our view that the Australian economy is in relatively good shape, which will be supportive for domestic equity markets delivering modest gains through the year, despite near-term global risks remaining elevated. We prefer domestic fixed interest to global, with the rate cutting cycle supportive of fixed rate bonds over floating rate. The likelihood of a moderate and gradual easing cycle suggests, however, that floating rate debt will still retain a degree of appeal in portfolios.
Written by
David Cassidy, Head of Investment Strategy
David is one of Australia’s leading investment strategists.
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