Inflation reaches highest rate since 2014

The latest upward move in the country’s CPI data has brought it to above 2 per cent year-on-year, which a senior economist says will “certainly be welcomed” by the RBA ahead of its monthly meeting next week.

According to fresh figures from the ABS, Australian consumer prices rose by 0.5 per cent q/q in the March quarter to 2.1, which according to ANZ’s Quick Reaction is its highest rate since September 2014.

ANZ said the headline CPI results were above its own forecast.

The strongest categories were fuel (+5.7 per cent), new dwelling purchase prices (+1.0 per cent), medical and hospital services (+1.6 per cent) and electricity (+2.5 per cent), while the ABS also noted that vegetable prices continue to be impacted by adverse weather.

Partially offsetting this was a seasonal fall for international holiday and accommodation (-3.8 per cent) as well as falls for fruits (-6.7 per cent) and furniture (-3.5 per cent).

Commenting on the result, AMP Capital chief economist Shane Oliver highlighted that the RBA targets inflation of 2 to 3 per cent over time.

In light of this, he emphasised that the latest gain in inflation “would certainly be welcomed by the central bank, given that the RBA rate cuts in 2016 were largely in response to very low inflation readings.

“The RBA would be happy that inflation is moving in the right direction.”

However, Mr Oliver noted that underlying inflation is “still too low” and will likely remain below the RBA’s target band for the majority of 2017.

“Wages growth still remains around record lows, the economy is running below-trend which indicates that spare capacity exists and the Australian dollar remains too high, all which will keep a lid on underlying inflation,” he added.

He concluded: “With inflation moving in the right direction, and given the RBA’s increased emphasis on an inflated Sydney and Melbourne housing market and rising household debt, the RBA is unlikely to make any adjustments to interest rates any time soon and we expect it to keep the cash rate at 1.50 per cent for the next year at least.

“However, low underlying inflation pressures mean that there is still more chance of a rate cut this year than a rate hike.”

[Related: CPI tipped to lift to 2%]

 

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Francesca Krakue

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