March CPI overshoots RBA and lender expectations

The March quarter 2024 Consumer Price Index (CPI) indicator revealed an unexpected increase of 1.0 per cent, leaving annual inflation at 3.6 per cent.

Prior to the release of the Australian Bureau of Statistics’ (ABS) data, bank economists predicted the inflation data to reveal a lift from 0.7 per cent to 0.9 per cent quarter on quarter.

With this latest information, the major bank economists have weighed in on what this might mean for the Reserve Bank of Australia’s (RBA) decision making heading into the May monetary policy meeting and beyond.

Reacting to the data, chief economist Westpac Group, Luci Ellis, said inflation was “a bit higher than expected in the March quarter”.

“It is declining, but it has a way to go for the RBA to be confident of returning to the 2–3 per cent target range on the desired timetable,” Ellis stated.

“We expect the board to keep rates on hold in May, and have pushed out the date of the first rate cut to November this year, previously September.

“We assess that the RBA will keep rates steady at its upcoming meeting. It will probably continue to be cautious about services inflation and domestic pressures broadly for a few months yet. We therefore do not expect any change to the messaging about not ruling anything in or out for another few months.”

Commonwealth Bank of Australia (CBA) economist Stephen Wu said the March quarter CPI broke “a strong of lower-than-expected monthly inflation figures since October last year”.

“The upside surprise predominantly came through the non-discretionary and non-tradables components of the basket. Non-discretionary prices rose by 4.2 per cent per year, while discretionary (ex. tobacco) inflation eased to 2.3 per cent per year. Non-tradables inflation was 5 per cent per year, whereas tradables came in at just 0.9 per cent per year,” Wu said.

“The upshot is that key drivers of inflationary pressures in Australia are centred around parts of the CPI basket where consumer demand is less able to respond to higher prices.

“Some components of the CPI basket are proving stickier than anticipated. A slower return of inflation to target has implications for the RBA’s policy decisions.”

Wu added that there’s a risk with a later start date to the first rate cut due to the CPI print being stronger than CBA and the RBA expected; however, the major bank expects no change in the cash rate during the May meeting.

ANZ senior economist Catherine Birch said the base case remains a November start to RBA rate cuts, with the March quarter being “consistent with the risks around that being skewed towards a later start”.

“We think the RBA will want to see a couple of quarters of lower non-tradables and services inflation to be convinced that overall inflation will not only return to the 2–3 per cent target band but remain there,” Birch said.

“As such, non-tradables and services inflation will need to slow materially in Q2 for rate cuts to begin at the November meeting (which comes after the Q3 CPI data), barring a more significant deterioration in labour market and/or activity data.”

CreditorWatch chief economist Anneke Thompson said while a fall in the inflation rate is “welcome news”, the March quarter figure is “unlikely to bring forward a cut to the cash rate, as services inflation continues to fall at a slow pace”.

“This means that businesses should brace themselves for the cash rate to remain at 4.35 per cent, at least until the fourth quarter of 2024,” Thompson said.

“The longer interest rates remain high, the more difficult trading conditions will be for the discretionary retail trade, food and beverage and construction sectors, and we expect a continuation of rising insolvency rates in these sectors as a result.”

[RELATED: Annual inflation eases for fifth consecutive quarter: ABS