Annual inflation slows to 3.6 per cent as higher than expected price rise in March quarter rules out early rate cut hopes

Inflation has come in higher than expected during the March quarter, dampening expectations of interest rate cuts later in the year.

The latest Consumer Price Index data from the Australian Bureau of Statistics showed prices increased by 1 per cent during the March quarter, leaving the annual inflation rate at 3.6 per cent.

Economists had expected inflation to increase by 0.8 per cent in the March quarter, and by 3.5 per cent annually.

Despite prices increasing by 1 per cent during the first three months of the year, the ABS's head of price statistics, Michele Marquardt, said annual inflation is continuing to fall from its peak in 2022.

"While prices continued to rise for most goods and services, annual CPI inflation was down from 4.1 per cent last quarter and has fallen from the peak of 7.8 per cent in December 2022," she said.

Although inflation is moderating, Wednesday's data has reduced the likelihood of the Reserve Bank of Australia cutting interest rates later this year.

"We still think that the next move from the RBA will be a cut rather than a hike, we know that the current cash rate is in restrictive territory, but we also think that activity will start to improve this year as well," said Catherine Birch, a senior economist at ANZ.

AMP deputy chief economist Diana Mousina agrees that the data for the March quarter has effectively ruled out rate cuts in the coming months.

"This inflation data will certainly renew some of that debate around whether we actually need to see higher interest rates," Ms Mousina said.

"We don't think we will see a further rate hike from here, I just don't think it's necessary, but the quarterly inflation data does mean that the risk of a near-term rate cut has absolutely disappeared."

Rising insurance premiums and childcare fees 

The ABS data showed that education, health, housing and food were the "most significant" contributors to the increase during the March quarter, with the quarterly rise in housing mostly driven by rents and new homes purchased by owner-occupiers.

Insurance premiums rose by 16.4 per cent annually — making it the strongest annual increase in 23 years.

Childcare prices also rose by 3.9 per cent in the March quarter, with Commonwealth Bank economist Stephen Wu noting "the increase in childcare subsidies only has a temporary impact on households' out-of-pocket expenses because of subsequent fee increases".

"Fee increases over the past two quarters have been large and have halved the benefit from higher subsidies introduced just six months ago," he said.

Wednesday's data also showed pharmaceutical products had increased by 7.1 per cent in the first three months of the year, which the ABS attributed to the annual resetting of the Medicare Safety Net and Pharmaceutical Benefits Scheme on January 1.

"While pharmaceuticals normally rise solidly in the March quarter and subsequently fall over the following quarters, this was the largest increase in more than a decade," Mr Wu said.

Recreation and culture prices also declined by 0.1 per cent in the March quarter, and were essentially flat over the year.

Meanwhile, underlying inflation, which is the Reserve Bank of Australia's preferred measure of inflation, was 4 per cent over the past year — down from 4.2 per cent in the December quarter.

Although prices are moderating in some categories and falling in others, Ms Birch said the RBA would be particularly concerned by an uptick in services inflation.

"What's quite concerning is that services inflation has actually accelerated on a quarterly basis and non-tradeables inflation (including rents, education and insurance) is still running too high as well, and they will certainly be in focus for the RBA," she said.

When will rates start being cut?

Callam Pickering, economist at global job site Indeed, said Wednesday's data is proof that inflation remains a key challenge for the economy.

"While inflation is coming down, consumer prices rose faster in early 2024 than anticipated, it's a sobering reminder that the battle against inflation isn't yet won," he said.

"These figures suggest that inflation may be above the RBA's inflation expectations by mid-year, which reduces the probability of a rate cut this year.

"In their February Statement on Monetary Policy, the RBA expected headline inflation to be 3.3 per cent by mid-year but following the March figures it's difficult to see that being achieved."

Westpac chief economist and former RBA assistant governor Luci Ellis expects the central bank will keep biding its time and leave rates unchanged at its meeting in May.

"We ... do not expect any change to the messaging about not ruling anything in or out for another few months," she said.

However, chief economist at IMF, Alex Joiner, said the data went against the central bank's assertion in March that inflation had been coming in "broadly as expected" and makes "late year rate cuts even more uncertain".

"While inflation moving towards the RBA's target is positive, it does not solve the cost of living concerns impacting the consumer," he said.

"Inflation is cumulative. Prices, as measured by the CPI, are up 20.4 per cent since mid 2019 and it will take a prolonged period of real wage growth before households feel at all comfortable with what is a permanently higher average price level."

Cost-of-living challenges in focus ahead of budget

The higher-than-expected increase to consumer prices in the March quarter comes as Treasurer Jim Chalmers finalises the upcoming federal budget ahead of its delivery on May 14.

Mr Chalmers said while Wednesday's figures showed the economy was making "progress" against inflation, the annual rate of 3.6 per cent was "still too high".

"It is encouraging to see inflation continue to ease in our economy, particularly when it is ticking up in other parts of the world and at a time of heightened global uncertainty, made worse by the recent escalation of the conflict in the Middle East," he said.

"The impact of these global factors and the shifting balance of risks from inflation to growth are key considerations as we finalise the budget over the coming weeks."

Mr Chalmers reiterated that the upcoming budget would "seek to balance the ongoing fight against inflation with the need to gear our economy for growth".

Shadow Treasurer Angus Taylor said Wednesday's consumer price data showed inflation was "too high", and accused the government of not "taking inflation seriously" with three weeks to go before handing down the federal budget.

However, Mr Chalmers signalled the upcoming stage 3 tax cuts, due to come into effect on July 1, would provide cost-of-living relief for households, and did not rule out the possibility of additional measures in the budget.

"We will consider additional help on top of that if it's affordable, if it's responsible and if it helps take some of the edge off inflation in our economy," he said.

But the looming stage 3 tax cuts pose a risk to inflation and the RBA's rate cut timeline, according to Moody's Analytics economist Harry Murphy Cruise.

"Those tax cuts will add money to the economy at the same time the RBA is trying to take it out," he said.

"What's more, a chunk of progress on inflation has come from temporary government rebates that will eventually unwind.

"We had expected the first rate cut to come in September. Increasingly, it's looking like we'll have to wait until November."

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