Australia's Core Inflation Hits 3-Year Low, Raising Hopes For Interest Rate Relief

Australia's core inflation dropped to a three-year low in the first quarter as prices in the services sector cooled, leading to the possibility of an interest rate cut in the coming weeks.

RBA rate cut in the offing?

Investors expect the Reserve Bank of Australia (RBA) to reduce rates by 0.25% on May 20, as global growth concerns, mainly due to US tariffs, grow. However, a higher-than-expected inflation reading has led some to reduce their bets on multiple rate cuts this year.

The Australian Bureau of Statistics revealed the consumer price index (CPI) rose by 0.9% in the March quarter, just above the 0.8% forecast. The increase was largely due to a 16.3% jump in electricity prices after some government rebates ended, Reuters reported.

Australia's core inflation drops to RBA's target range

Annual CPI inflation in Australia remained steady at 2.4%. The trimmed mean measure of core inflation rose by 0.7% in the first quarter, slightly above the forecasted 0.6% increase.

On an annual basis, it slowed to 2.9%, down from 3.3%, returning to the Reserve Bank of Australia's target range of 2% to 3% for the first time since late 2021. Inflation in the services sector also eased, dropping to 3.7% in the first quarter, the lowest level since June 2022.

Such core inflation numbers are a boost for Prime Minister Anthony Albanese, whose Labor Party is campaigning on reducing high inflation ahead of a close federal election on Saturday. Treasurer Jim Chalmers said that the data didn't change market expectations for further easing in monetary policy.

Analyst Tony Sycamore from IG explained that concerns over global growth and a softer inflation outlook suggest the RBA was likely to cut interest rates by 25 basis points in May to address growth risks.

The RBA chose not to adjust rates in April but indicated that the May meeting could be a chance to reconsider its monetary policy. The RBA has pointed out that the impact of US tariffs on Australian inflation is uncertain.

While supply issues are likely pushing prices up, changes in trade could also help lower inflation.

RBA cautious on strong labor market

The RBA is also concerned about the strong labor market, which could drive inflation higher. However, the main measure of wage growth has slowed, even as employment continues to grow, and the unemployment rate remains at a historic low of 4.1%.

Data from Wednesday showed that education costs rose by 5.7% in the first quarter, but insurance price increases slowed to 7.6% from the double-digit growth seen in previous quarters. Construction costs for new homes rose by 1.4% in the March quarter, the smallest increase since June 2021.

Earlier this month, Albanese and Coalition leader Peter Dutton announced varying housing policies as part of their election commitments. However, economists believe that both Labor and Coalition housing policies are failing to address the basic issue of housing supply, which could lead to rising property prices.