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Some encouraging news for Australia’s central bank as headline inflation re-entered its target range for the first time since 2014.
Headline inflation rose 0.5 per cent quarter-on-quarter in the first three months of 2017, according to the Australian Bureau of Statistics. That matched the December quarter and came in a touch below expectations for a 0.6 per cent gain.
That took the annual rate to 2.1 per cent, up from 1.5 per cent in the December quarter and versus forecasts for a 2.2 per cent rise. This was still enough to lift headline inflation up into the Reserve Bank of Australia’s 2 per cent to 3 per cent target range for the first time since the September quarter of 2014.
Underlying inflation, taken as an average of the so-called trimmed mean and weighted median, rose by an annual pace of 1.8 per cent in the three months ended March 31. Both of those individual measures increased from the December quarter, but only the trimmed mean’s rate of growth exceeded economists’ expectations.
At its April policy meeting, where it kept interest rates unchanged at a record low 1.5 per cent, the Reserve Bank of Australia again said it expected headline inflation to pick up over the course of 2017 and head back to 2 per cent, but that underlying inflation’s recovery would be “a bit more gradual” owing to subdued growth in labour costs.
The Australian dollar initially rose as much as 0.3 per cent following the release, but has since eased to be 0.2 per cent lower at $0.7519.
Among individual categories, the biggest gains during the quarter were petrol (up 5.7 per cent), medical and hospital services (1.6 per cent), which were partially offset by declines in furnishings, household equipment and services (-1 per cent) and recreation and culture (-0.7 per cent).
Vegetable prices are up 13.1 per cent in the 12 months ended March 31, with adverse weather hurting the supply of the likes of potatoes, salad vegetables, cabbage and cauliflower. These price rises were offset by falls for capsicums and broccoli.
National Australia Bank tipped the annual rate of underlying inflation between 1.8 per cent and 1.9 per cent. Tapas Strickland, an economist at the bank, said ahead of the release of the data:
For the RBA, a tick-up in the pace of headline inflation will be encouraging as it should increase confidence core inflation will return to target. However, the RBA is also concerned with the lack of improvement in the labour market with stronger wages growth important to sustain a durable return to the inflation target. NAB sees the RBA on hold in 2017 and 2018 with the RBA having little appetite to ease policy further given house prices and risks in household balance sheets.
Economists at Westpac note that March is typically a “seasonally softer quarter” and said ahead of the inflation release:
We are forecasting a reversal in fresh fruit & vegetable prices, further declines in clothing & footwear plus household contents & services while housing costs remain contained. Offsetting is seasonal jump in pharmaceuticals, the bump in auto fuel prices and signs that the energy crisis is feeding into higher utility bills.