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Australian inflation surprisingly cold, case builds for rate cut

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Australian inflation slowed sharply last quarter to the lowest in three years on weak petrol prices and a stubborn lack of wage pressure, a disappointingly soft outcome that ticks one of the boxes for an interest rate cut this year.

[SYDNEY] Australian inflation slowed sharply last quarter to the lowest in three years on weak petrol prices and a stubborn lack of wage pressure, a disappointingly soft outcome that ticks one of the boxes for an interest rate cut this year.

Just this month, the Reserve Bank of Australia (RBA) said that if inflation failed to accelerate as desired and unemployment were to suddenly trend higher, then rates would need to be cut from an already record low of 1.5 per cent.

While the labour market has stayed firm so far, inflation is not cooperating at all. The headline consumer price index (CPI) was flat in the March quarter, below forecasts for a 0.2 per cent increase and the lowest since a negative reading in early 2016.

The annual CPI inflation braked to 1.3 per cent in the March quarter, from 1.8 per cent in the previous quarter, and was the lowest since September quarter of 2016.

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Key measures of underlying inflation favoured by the RBA averaged around 1.4 per cent for the year, marking 13 quarters below the central bank's target range of 2 to 3 per cent.

The last time inflation was this tepid, the RBA had responded by two rate cuts in 2016 - one in May and the other in August.

Investors responded to Wednesday's data by beating the local dollar to US$0.7037, the lowest since March 11 while interest rate futures are fully priced for a quarter-point cut by October.

The main drags on inflation in the March quarter were lower petrol prices, domestic and international holidays, travel and accommodation. Petrol has since turned around sharply and will likely lift inflation this quarter.

Price increases were seen for food, partly due to a drought, and secondary education.

Suboptimal inflation is hardly confined to Australia with everything blamed from globalisation, to the rise of China, the decline of unions and the concentration of market power among an ever-smaller group of giant corporations.

It can also become self-fulfilling by pulling down expectations of future inflation. Companies become reluctant to raise prices for fear of losing to the competition, while workers become resigned to miserly wage gains.

The paucity of pay growth has become a particular concern for policy makers, with annual wages crawling along at 2.3 per cent in Australia even as unemployment fell to a decade-low of 5.0 per cent.

The dichotomy is also dominating the Federal election campaign with the opposition Labor Party campaigning on government-driven ways to boost wages, while the ruling Coalition sticks with laissez-faire policies.

A vote is due on May 18 and, so far, Labor leads in the polls.

REUTERS