Australia posts weak Q1 inflation data, underlying inflation to remain below policy target band for some time

Australia posted weak inflation data for the first quarter of 2016. The underlying and headline inflation came in much below expectations. CPI showed a drop in prices in Q1, the first fall since December 2008. In Q1, non-tradables inflation accelerated 0.4%, the same rate at which it accelerated in Q4 2015. It is only 1.7% higher over the year. Domestic market services inflation accelerated weakly by just 1.1% y/y. Inflationary pressures in non-tradable items will continue to be benign given the weak wages growth and expected slowing of housing sector, according to ANZ.

Meanwhile, inflation in tradables was quite soft. Prices of tradables declined 1.4% q/q. Most of this indicates sharp decline of petrol prices, but even after stripping off tobacco and volatiles, tradables declined 0.5% q/q and rose just 0.4% y/y. This seems that retailers are still trying to increases prices. Furthermore, AUD’s recent gains are likely to weigh on trade prices in the future, noted ANZ. Fuel subtracted 0.3ppt from Q1 CPI data, as expected, while education and health contributed by 0.1ppt.

The inflation data for March will put the Reserve Bank of Australia in a tough spot. The underlying inflation is now expected to remain lower than the central bank’s policy target band for some time, said ANZ. However, Australia’s domestic activity seems strong currently, but the RBA will be aware that certain tailwinds are expected to wane in H2 2016, added ANZ.