This comes after consecutive increases of 0.6%q/q in each of the previous two quarters. The Q1 rise in the underlying inflation measures, which remove movements in the more volatile consumer items, also was low at just 0.5%q/q, albeit in line with expectations. These rises leave annual inflation at just 1.9% on most measures.
Annual headline inflation now has been below the Reserve Bank of Australia’s (RBA) 2-3% target range for a full year – the underlying measure has been sub-target for twice that long! In fact, after excluding the brief sojourn back above 2% in early 2017 on the back of soaring energy prices, headline inflation has been below target since late 2014! The RBA responded to this undershoot, of course, by cutting the cash rate to the current record low of 1.5% in 2016 but, as yet, this policy support has done little to lift either wages or inflation.
There are a number of factors contributing to this unusually extended period of low inflation. The economy still has pockets of spare capacity, including in the labour market, which helps to explain why wages growth is close to record lows. Outside the spike in energy prices, then, there is little cost-push pressure for firms to raise prices. Also, competition in retailing has intensified, particularly from new and powerful offshore players, meaning compression of domestic retailers’ margins continues.
Finally, Inflation overseas also has been unusually low, so Australia is not importing higher prices from elsewhere. Today’s report showed that tradables inflation – prices influenced by overseas factors and the exchange rate – actually was negative in Q1, both over the quarter and the year. Non-tradables inflation, which reflects only domestic considerations, rose 0.8%q/q, and has increased more than 3% over the last year.
The main drivers of inflation here last quarter were material price rises for secondary education (up another 3.3%), gas and other household fuels (+6.0%), pharmaceuticals (+5.6%) and fresh vegetables (up 5.6%). The main deflationary forces pulling in the opposite direction were price falls for overseas holidays travel and accommodation (down 2.4%), electronic equipment (down another 6.1%), and furniture (-2.8%).
For the RBA, today’s inflation data essentially mean there is no pressure on officials to lift interest rates any time soon. Governor Lowe indicated in a recent speech that the next move in interest rates is more likely to be up than down, but a prerequisite is that inflation returns to the target range. This is likely to happen later this year as more spare capacity is absorbed but, for now, the RBA almost certainly will extend its current record-long period of inactivity on policy.