This morning saw Q1 CPI released by the ABS. The headline figure came in at a very weak +0.1% q/q (against expectations of around+0.7%) which saw the annual rate drop to 1.6% as the high Q1 number from 2011 drops out of the calculation. This brings headline inflation back to levels not seen since Q2/Q3 2009 in the immediate aftermath of the GFC.
The more closely watched core inflation data has also fallen sharply to just +0.3% q/q for an annual increase of 2.2% (down from +2.6% last quarter). This takes the RBA's preferred measure of price pressures close to the bottom of their target range (2-3%) and will clearly open the door for them to ease rates when they next meet on May 1st. In the past 6 months prices have ground to a halt with the core inflation measure indicating just a 0.9% increase in the past 2 quarters.
The burning question now will be whether that cut is 25bps or a full 50bps. We have previously been sceptical of the RBA's desire (or need) to cut 50bps and, while we still feel a 25bps cut the more likely outcome next Tuesday, these are indisputably weak numbers that certainly allow scope for a larger cut.
The forex markets have reacted with predictable speed and the A$ has lost almost half a cent against the US$ since the data release.
On the flip side is the fact that revisions upwards to previous data means that the core inflation year on year increase (+2.2%) is actually not a lot lower than the markets had been expecting (about +2.3%). Although much will be made of the very low headline number, we can be certain that the RBA will be focused on the core data. Just as an aside, it is perhaps worth noting that the last time core inflation fell from +2.6% to +2.2%, which was in Q4 2010, the RBA didn't cut rates until November 2011.