Australia's core inflation dropped to its lowest level in three years during the first quarter, driven by a significant easing in service sector costs, according to data released on Wednesday.
This trend strengthens the argument for the Reserve Bank of Australia (RBA) to lower interest rates again in the coming weeks.
Investors are already anticipating a 0.25% rate cut on 20th May, largely due to growing concerns about global economic growth, mainly triggered by US tariffs. However, a surprisingly high headline inflation figure has led some to temper expectations for as many as five rate cuts this year, Reuters reports.
According to the Australian Bureau of Statistics, the consumer price index (CPI) rose by 0.9% in the March quarter, slightly exceeding the expected 0.8% increase. This was largely driven by a 16.3% surge in electricity prices following the expiry of some government power bill rebates. Meanwhile, annual CPI inflation remained unchanged at 2.4%.
The trimmed mean measure of core inflation rose by 0.7% in the March quarter, slightly above expectations of a 0.6% increase. However, the annual rate dropped to a three-year low of 2.9%, down from 3.3%, marking its return to the RBA’s 2–3% target range for the first time since late 2021.
Notably, services sector inflation also eased to 3.7%, its lowest level since the June quarter of 2022.
Tony Sycamore, an IG analyst, stated that with growing downside risks to global growth and a more subdued short-term inflation outlook, the RBA is likely to prioritise those risks and reduce interest rates by 25 basis points in May.
Pradeep Philip, head of Deloitte Access Economics, agreed with this view.
“A May rate cut should not be viewed as the RBA declaring ‘mission accomplished’ in the fight against inflation. Instead, it should be viewed as insurance against any collateral damage a trade war and geopolitical turbulence may cause the Australian economy.”
The central bank held off on cutting interest rates in April but signalled that the May meeting would be a key opportunity to reassess monetary policy.
Furthermore, while the RBA acknowledged that US tariffs could influence local inflation, it noted the effects remain uncertain, supply constraints may be driving prices up, but potential trade diversion could also help ease inflationary pressures.
In addition, the RBA has expressed concern that a strong labour market could fuel inflation, though this risk appears to be easing as wage growth slows despite robust job gains and a historically low unemployment rate of 4.1%.
Data released on Wednesday also showed education costs rising by 5.7% in the first quarter, while insurance prices increased at a slower pace of 7.6%, down from double-digit growth in previous quarters.