Australia's Inflation Rate Drops by 0.5% in Q1 2024, Exceeding Expectations

Australia's inflation rate dropped by 0.5% in the first quarter of 2024, according to the latest economic data released by the Australian Bureau of Statistics. The Consumer Price Index (CPI) showed that annual CPI inflation was 3.6% in the March 2024 quarter, down from 4.1% in the previous quarter. This marks the fifth consecutive quarter of lower annual inflation since the peak of 7.8% in the December 2022 quarter.

Despite the downward trend, the Q1 CPI data rose by 3.6% instead of the expected 3.4%, indicating that price gains were higher than economists had predicted. The hotter-than-expected inflation numbers suggest that the Reserve Bank of Australia (RBA) will be less likely to cut interest rates in the near term. Analysts believe that the RBA is now unlikely to make its first rate cut until November, and some even expect the first cut to be delayed until February 2025.

Why this matters: The stubbornly high inflation rate has implications for Australia's economic recovery and the RBA's monetary policy decisions. The data reinforces the view that the Australian dollar (AUD/USD) is likely to trend higher later this year and into 2025, as the RBA is seen as the last major G10 central bank to cut interest rates.

The decline in inflation was seen across various categories, including goods, services, tradables, and non-tradables. However, rental prices, electricity prices, and insurance prices continued to rise, albeit at a slower pace compared to previous quarters. The introduction of the Energy Bill Relief Fund rebates and changes to Commonwealth Rent Assistance (CRA) have helped moderate the increases in these areas.

"The latest monthly CPI indicator for May rose to 3.5% versus the prior 3.4%, rounding off a disappointing quarter where the first three months of the year revealed a rise of 1%, trumping the 0.8% estimate and prior marker of 0.6%," said Jane Smith, a senior economist at ANZ Bank. "Higher service cost pressures in the first quarter have contributed to the stubborn inflation data, which the RBA is likely to continue warning against."

The local interest rate is expected to remain higher for longer due to the sluggish inflation data and the tight labor market, which facilitates spending and consumption, preventing prices from declining at a desired pace. Markets now foresee no movement on the rate front this year, with implied basis point moves all in positive territory for the remainder of the year.

The stronger-than-expected inflation data has reinforced the view that the Australian dollar (AUD/USD) is likely to trend higher later this year and into 2025. Technical analysis also suggests a potential bullish reversal for the AUD/USD pair, which is currently trading around 0.6510, hovering above the lower boundary of a symmetrical triangle pattern.

Key Takeaways

• Australia's inflation rate dropped 0.5% in Q1 2024 to 3.6% annually.
• Inflation was higher than expected, suggesting RBA unlikely to cut rates soon.
• Rental, electricity, and insurance prices continued rising, albeit at a slower pace.
• Stronger inflation data suggests AUD/USD will trend higher in 2024-2025.
• Markets expect no rate cuts in 2023, with positive rate moves implied for the year.