The policies of Australian economists are having a positive effect, as the Bureau of Statistics has also recorded the headline inflation rate remaining constant at an annual rate of 2.4% in March. Even better, the RBA’s chosen measure of ‘trimmed mean inflation’ has also dropped from 3.3 %to 2.9%. This is the first time in over 3 years the measure has fallen within the RBA target band of 2-3%.
Market Expectations and Inflation Data
Data released by ABS indicated that headline inflation was recorded at 0.9%, a rise following two quarters of smaller 0.2% increases. This also kept the annual rate of inflation at 2.4%. Economists interviewed by Reuters broadly expected a headline 2.3% for the 12 months through March, with the trimmed mean falling to 2.8% within the RBA's target range.
RBA Focuses on Trimmed Mean Inflation
The RBA's focus on the trimmed mean is that it needs a measurement of the inflation metric that accurately captures the trend by smoothing out the most volatile components. This flexibility makes it robust for use in assessing underlying inflation trends.
According to Abhijit Surya from Capital Economics, the RBA will not focus too much on the inflation rate headline figure as it continues to be affected by government subsidies and administered price movements.
Surya added that “In broad terms, the overarching theme is that inflation is developing more or less than the RBA’s expectations.” With the increase in trimmed mean CPI over the last few months, Surya estimates it could reach 2.7% by mid-year, which aligns with the bank’s February forecast.
Future of Interest Rates
As of the CBA, Gareth Aird, head of Australian Economics, stated that the annualised six-month rate of underlying inflation came down to 2.5% for the March quarter, resting at the midpoint of the RBA's target range. He predicts the RBA will cut interest rates three times this year, the first one being a 0.25 percentage point reduction in May.
In the March quarter, inflation for services dropped to 3.7% from 4.3% in December, marking the lowest annual inflation for services since June 2022. This was attributed to a decrease in rent and insurance prices. For now, annual inflation of goods increased from 0.8% to 1.3% due to a large spike in electricity prices in the March quarter.
This echoes the RBA's forecast and supports the case for interest rate reductions in the coming months. The effects of government-provided aid and controlled price adjustments continue to skew the headline inflation figure, underscoring the need to focus on core inflation metrics. As the RBA prepares for its May meeting, the data indicates that additional rate cuts will bolster economic growth while sustaining inflation within set levels.
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