Q1 inflation points to May rate cut

The March quarter consumer price index (CPI) came in slightly above market expectations but still encouraged the case for an RBA rate cut at the May policy meeting.

Without the renewed concerns over global growth and tariff uncertainty, the outcome of the May meeting might have been more finely balanced. The RBA may even have considered waiting for the June quarter inflation report before cutting rates further.

In summary, the headline CPI rose by 0.9% in the quarter (economists were expecting +0.8%). This kept the annual inflation rate steady at 2.4%.

Housing made the biggest contribution to the overall CPI increase. While rental inflation and construction costs continued to ease, the end of some government electricity subsidies pushed prices higher.

On the lighter side, given the federal election campaign, egg prices rose a further 1.3% in the March quarter. Egg prices are up 12.4% over the year!

The underlying trimmed mean inflation also edged above expectations but remained reasonably contained. It rose by 0.7% (versus the 0.6% forecast), bringing the annual trimmed mean rate down to 2.9% from 3.3%.

Headline and Trimmed Mean Annual Inflation

Source: Australian Bureau of Statistics

Underlying inflation continues to track broadly in line with the Reserve Bank’s projections and slightly ahead of economists’ estimates. In its November Statement on Monetary Policy, the RBA projected that trimmed mean annual inflation would reach 2.8% in the June quarter.

To meet the RBA’s forecast, trimmed mean inflation must rise by 0.8% in the next quarter. That outcome appears achievable, given the recent trend of easing inflation. In fact, current risks lean toward a smaller-than-0.8% price rise in the June quarter.

Heading into the RBA’s May policy meeting, the main question is now the size of the rate cut.

Signs of a backdown from Trump as well as a recovery in global markets have eased some concerns. However, those risks still linger. In this context, a traditional 0.25% rate cut appears most likely.

That said, there’s a strong case for a 0.35% cut. This is driven by further declines in local inflation and ongoing global growth concerns. A 0.35% move would also restore the RBA’s official cash rate to its standard quarter-point increments.

The RBA is unlikely to consider a 0.5% cut in May unless global growth risks escalate significantly in the coming weeks. Such a move would suggest panic and would not be justified by the solid – though not exceptional – March quarter CPI data.