RBA’s Preferred Inflation Measure Returns to Target Band for First Time in Over Three Years
While overall inflation remained steady in the March quarter, the Reserve Bank of Australia’s (RBA) preferred gauge of consumer prices — the trimmed mean inflation — has dropped back within its target range for the first time since late 2021.
Data from the Australian Bureau of Statistics showed headline inflation held firm at an annual rate of 2.4 per cent. Meanwhile, trimmed mean inflation — which excludes volatile price movements — eased from 3.3 per cent to 2.9 per cent.
Economists surveyed by Reuters had anticipated slightly lower figures, projecting 2.3 per cent for headline inflation and 2.8 per cent for the trimmed mean, both within the RBA’s 2–3 per cent target band.
Prior to the data release, financial markets were nearly certain the RBA would implement a 0.25 percentage point interest rate cut at its May 20 meeting, with a small possibility of a larger reduction.
The data revealed a 0.9 per cent rise in prices for the March quarter — a marked increase after two quarters of just 0.2 per cent growth — which explains why the annual headline inflation rate held steady. A slightly lower rise would have seen the annual figure decline.
Abhijit Surya of Capital Economics noted that the RBA is unlikely to give much weight to the headline figure, as it’s skewed by government subsidies and regulated price changes.
“Inflation is broadly progressing in line with the RBA’s forecasts,” he said. “If the trimmed mean CPI continues rising at its current pace, it should reach 2.7 per cent by mid-year — consistent with the Bank’s February outlook.
“That would justify a 25 basis point rate cut to 3.85 per cent in May.”
Electricity Prices Drive Quarterly Inflation Rise
Indeed’s Asia-Pacific economist, Callam Pickering, attributed the sharper quarterly inflation increase to higher electricity prices, following the expiry of various subsidies.
He noted that electricity costs jumped 16.3 per cent in the quarter, with Queensland households especially affected after exhausting their $1,000 electricity rebate — which had previously kept prices lower in the September and December quarters.
“This caused out-of-pocket electricity spending in Queensland to effectively quadruple,” he said.
Households in other states were also impacted to a lesser extent, with federal subsidies reduced during the same period.
“This underlines how inflation figures in Australia are distorted by temporary government measures aimed at easing cost-of-living pressures,” Pickering said. “It’s why underlying inflation indicators — like the trimmed mean — are so important.”
With the trimmed mean inflation rate back within the RBA’s preferred range, Pickering said a rate cut in May is all but certain.
“Even if the inflation data had been worse, the RBA was likely to cut — but these figures actually show improvement in key areas,” he said.
Services Inflation Hits 21-Month Low
Breaking the data down further, services inflation dropped to 3.7 per cent in the March quarter from 4.3 per cent in December — the lowest since June 2022 — driven by reduced rents and insurance costs.
Goods inflation, on the other hand, edged up from 0.8 per cent to 1.3 per cent, largely due to the sharp rise in electricity prices.
