Consumer Price Index data was released this week which showed a sharp rise in inflation during the March quarter, some of this due to the floods and inclement weather during the quarter, some not. The RBA targets long-term inflation of between 2% and 3% on an annual basis. The all groups inflation indicator increased by 1.6% during the quarter, well above the market expectation and taking annual headline inflation to 3.3%. Importantly, the RBA’s preferred measures (weighted median and trimmed mean) increased by a much lower 0.8% and 0.9% respectively during the quarter. On an annual basis these two measures of underlying or ‘core’ inflation remain well within the RBA’s target range at 2.2% and 2.3% respectively.
The items which recorded the greatest quarterly increases in inflation were: education (5.7%), health (3.9%), food (2.9%) and transportation (2.7%). The increase in education and health is a seasonal blip which occurs each year during the March quarter however, only the increase in food can really be attributed to the weather during the quarter and what’s more that can only be partially attributed to loss of crops. Although there was a sharp rise in inflation some items did record a fall: household contents and services (-1.6%), clothing and footwear (-0.7%) and recreation (-0.6%).
The RBA has their May board meeting next Tuesday and will decide whether or not to adjust official interest rates. Although the CPI figure came in well above market expectations the RBA has stated that they will look through any short-term effects of the cyclones and floods. We would expect that rates will remain unchanged however, given the sharp rises in transportation (petrol) and some strong increases elsewhere, if these persist the RBA may have to lift rates sooner rather than later.
Source: RP Data
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