In the early 1990s, entrenched inflation in Australia was broken by the “recession we had to have”, as it became known. Since then, core consumer price inflation has averaged around 2.6% which, coincidentally, is almost the midpoint of the RBA’s target range of 2%-3%. In recent years, various measures of consumer inflation have been in a down-trend despite attempts by the RBA to increase them through historically low cash rates.
Consumer price indices from the March quarter have now been released by the ABS and both the headline and seasonally-adjusted figures exceeded market expectations for a second consecutive quarter. The headline inflation rate came in at +0.3% for the quarter, down from the December quarter’s +0.7% while the seasonally-adjusted inflation rate slowed from +0.6% to +0.4%. On a 12-month basis, both headline and seasonally-adjusted inflation registered 2.2%, both having recorded 1.8% growth rates in the December quarter.
The RBA’s preferred measure of core inflation, the “trimmed mean”, remained unchanged from December’s value on a quarterly basis after revisions, while it increased on an annual basis. The trimmed mean inflation rate for the March quarter was +0.5%, higher than the +0.3% which had been the market’s expected figure. The 12-month growth rate increased from 1.6% to 1.8%.
Commonwealth Government bond yields were largely unchanged, ignoring modestly lower US Treasury yields in overnight trading. By the end of the day, the 3-year ACGB yield had slipped 1bp to 0.25% while 10-year and 20-year yields finished unchanged at 0.92% and 1.51% respectively.
In the cash futures market, expectations of a rate cut firmed slightly. At the close of business, May contracts implied a rate cut down to zero as a 62% chance, unchanged from the previous day. June contracts implied a 58% chance of such a move, up from 56% while July contracts implied a 67% chance, up from 65%. Contract prices of months in the remainder of 2020 and through to mid-2021 implied similar probabilities, ranging between 43% and 65%.