Fin-X Pulse - Core CPI hits the RBA target range

Australian inflation exceeded forecasts in Q1, and saw upward revisions to the previous quarter. However, a range of statistics support RBA rate cuts. The market is still expecting a rapid series of five cuts by year-end, which likely requires a material slowdown overseas since it's not justified by domestic figures.

• Australian monthly and quarterly CPI figures exceeded forecasts in March, rising by an annual +2.4%.

• The December quarter's trimmed mean measure was revised up by +0.1% to +3.3% yoy. The March reading was then +0.1% above estimates, coming in at +2.9% yoy.

• The weighted median measure was +3.0% yoy, also +0.1% above forecasts after a similar upward revision to the previous quarter's results.

• The main contributors to the quarterly CPI rise were Housing (+1.7%), Education (+5.2%) and Food and non-alcoholic beverages (+1.2%).

• The quarterly growth in Housing was driven by Electricity (+16.3%), which was driven by increases in electricity prices in Brisbane where most households have used up the $1,000 Queensland State Government electricity rebate resulting in higher out of pocket electricity costs. Some households in the remaining states and territories also saw rises in electricity bills this quarter. This comes as the impact from the Commonwealth Energy Bill Relief Fund (EBRF) rebates was lower in the March quarter compared to the December quarter due to the timing of rebate payments.

• Education prices increased +5.2% this quarter, following the start of the school year. Preschool and primary education rose +5.6%, Secondary education rose +6.4%, and Tertiary education rose by +3.6% due to the annual indexation of university course fees.

• The rise of +1.2% in Food and non-alcoholic beverages was driven by fruit and vegetables (+2.8%). 

• The main contributors to the +2.4% annual rise in annual inflation were Food and non-alcoholic beverages (+3.2%), Alcohol and tobacco (+6.5 per cent) and Housing (+2.0 per cent).

• Annual Goods inflation was +1.3%, up from 0.8 per cent in the previous quarter. The increase in annual Goods inflation was primarily due to the rise in Electricity, which rebounded this quarter after strong falls in the past two quarters.

• Annual Services inflation was +3.7% in the March quarter, down from +4.3% in the December quarter. Leigh Merrington, ABS acting head of prices statistics, said, "This is the lowest annual outcome for Services inflation since the June 2022 quarter, reflecting easing inflation across a broad range of services, including rents and insurance."

• March private sector credit growth (excluding financial businesses) was +6.5% yoy for the fourth consecutive month. Annual business credit growth (+8.4% yoy) is high but appears to have peaked in December at +9.3%yoy. Annual growth in the M3 and broad money measures appear to have peaked slightly earlier in October last year.

• The official Chinese PMIs slowed by more than anticipated in April. Manufacturing dropped back into contraction from 50.5 in March to 49.0, while non-manufacturing slipped from 50.8 to 50.4. The Caixin Manufacturing PMI slowed from 51.2 to 50.4.

• S&P/ASX200 8,084 +0.2%, AUDUSD 0.6394 +0.16%, Aus 10yr 4.15% -3bps

Fin-X Wealth View

• The RBA will be pleased to see headline and core inflation back within the 2%-3% range. Core inflation also appears to be falling relatively rapidly, excluding the noise of the government’s electricity subsidies. 

• The apparent peak in credit growth also suggests that demand is slowing so the Board can be reasonably confident that CPI will remain within the target range. 

• This obviously provides room for rate cuts, and a -0.25% cut on May 20th seems very likely.

• The debate now centres on the appropriate pace of further cuts. Before today the market was pricing five quarter point cuts by the end of the year, implying a year-end rate of 2.9%. With unemployment still holding at 4.1%, the economy would have to deteriorate fairly rapidly to justify so many cuts.

• That is possible given slowing Chinese output and ongoing tariff uncertainty. However, that's quite a bit of bad news priced into the front end of the curve. We wouldn't be surprised to see fewer cuts given the RBA's recent reticence. Longer-dated maturities appear to offer better value.

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