Australia’s headline inflation rate held steady at a four-year low of 2.4% in the March quarter, according to official data, adding to the case for a cut in interest rates at the next Reserve Bank board meeting in May.

A key measure of underlying inflation closely watched by the RBA fell to 2.9%, returning to within the 2-3% inflation target band^[1] for the first time since 2021.

Food and beverages, tobacco, education and housing were the main contributors^[2] to the rise in the headline Consumer Price Index^[3].

Financial markets are pricing in a quarter-percentage point cut in the cash rate to 3.85% in May.

The inflation report was the last piece of major economic data before Saturday’s federal election.

Prices are still rising, just at a slower rate

A fall in inflation does not mean prices are falling. Overall, prices are continuing to rise, but at a slower pace^[4].

Moreover, prices continue to rise at a higher rate for some things people notice most, such as meat, fruit and vegetables. Concerns about the high cost of living will not go away. But it is good news for households that prices are now rising less than wages^[5], which are growing by 3.2%^[6].

Some of the CPI components rising fastest are services such as health, which rose 4.1% in the year to March, and education, up 5.7%.

Rents increased by 5.5% over the year, still rapid but less than in 2023 and 2024. The movements differed across the country. Rents were up almost 9% in Perth but fell in Hobart.

New home prices only rose by 1.4% over the year as project-home builders made promotional offers to attract buyers in a more subdued market.

Some of the recent fall in inflation represents the effect of government measures such as temporary electricity rebates and lower public transport fares. These represent some relief for households from cost-of-living pressures. But they may obscure trends in underlying inflationary pressures.

The Reserve Bank’s preferred measure of underlying inflation, the trimmed mean measure^[7], removes such impacts by excluding items with the largest price movements up or down. This measure of inflation has fallen to 2.9%, back within the central bank’s target, from 3.3%.

Green light for an interest rate cut

Headline inflation is around the middle of the Reserve Bank’s 2-3% medium-term target band^[8]. The large 1% quarterly increase in the June quarter of 2024 will drop out of the next annual calculation. So inflation may soon be below the bottom of the band. This has been forecast^[9] by Westpac’s economics team (headed by former RBA assistant governor Luci Ellis), for example.

In its most recent published forecast^[10] the Reserve Bank expected inflation to be 2.4% in June. So it may be pleased to see it already there for two quarters. It would also be relieved to see the underlying rate back within the target band.

In February, Reserve Bank Governor Michele Bullock conceded^[11] the bank had arguably been “late raising interest rates on the way up”. It did not want to be late on the way down.

At its April 1 meeting, the Reserve Bank board called^[12] the May 19-20 meeting “an opportune time to revisit the monetary policy setting with the benefit of additional data about inflation” and other factors.

Read more: Reserve Bank holds rates steady, cautious about the economic outlook^[13]

Global economic outlook darkens

The outlook for global economic activity has weakened as the US’s trade war with China has escalated. The International Monetary Fund cut its forecast^[14] for global economic growth in 2025 from 3.3% to 2.8%.

The negative outlook for the global economy and rising business uncertainty^[15] certainly adds weight to the case for an official interest rate cut. It would help Australian businesses weather a possible downturn.

Tariff rises will push up inflation in the US. But there is a bipartisan commitment in Australia not to engage in retaliatory tariff increases. This means there will not be any such inflationary impetus here.

Indeed, as Bullock pointed out in her April press conference^[16], if China diverts exports that are effectively blocked from entering the US to Australia, then the US tariffs may lower inflationary pressures here.

Concerns about the inflationary impact of a weaker Australian dollar^[17] have eased in recent days. The currency has rebounded to 64 US cents^[18] from its early April low of 59.5 US cents.

The Reserve Bank will, as always, consider a wide range of information in deciding whether to cut interest rates in May. But the single most important piece of information is now giving it the green light.

Market economists expect^[19] another couple of rate cuts in 2025 after May, depending on the impact of the erratic US economic policies on the global economy.

What does it mean for the election?

After the CPI release, Treasurer Jim Chalmers noted core inflation was at a three-year low. “This is a powerful demonstration of the progress that Australians have made together in the economy,” he said^[20].

Chalmers will be hoping the Reserve Bank and the electorate share his view. Labor is more likely to be re-elected if voters regard the cost-of-living pressures as abating.

References

1. ^{^} 2-3% inflation target band (www.rba.gov.au)
2. ^{^} main contributors (www.abs.gov.au)
3. ^{^} Consumer Price Index (www.abs.gov.au)
4. ^{^} but at a slower pace (www.abc.net.au)
5. ^{^} prices are now rising less than wages (www.abc.net.au)
6. ^{^} 3.2% (www.abs.gov.au)
7. ^{^} trimmed mean measure (www.rba.gov.au)
8. ^{^} target band (www.rba.gov.au)
9. ^{^} forecast (library.westpaciq.com.au)
10. ^{^} forecast (www.rba.gov.au)
11. ^{^} conceded (parlinfo.aph.gov.au)
12. ^{^} called (www.rba.gov.au)
13. ^{^} Reserve Bank holds rates steady, cautious about the economic outlook (theconversation.com)
14. ^{^} forecast (www.imf.org)
15. ^{^} business uncertainty (theconversation.com)
16. ^{^} April press conference (www.rba.gov.au)
17. ^{^} weaker Australian dollar (theconversation.com)
18. ^{^} to 64 US cents (www.xe.com)
19. ^{^} expect (library.westpaciq.com.au)
20. ^{^} he said (www.abc.net.au)