Rate-cut hopes fade as inflation jumps

Hopes for a further imminent cut to interest rates have faded somewhat with the much higher-than-expected March quarter CPI figure released today.

A rise in the CPI of 1.1 per cent in the first three months of 2001, up from just 0.3 in December, puts the annual inflation rate at (a still-GST-affected) 6 per cent.

On balance, the chances of a rate cut in May have lessened today but have not disappeared – the March result shows an increase in inflationary pressures in the economy, but not to a degree that suggest ongoing inflation problems this year.

A 3.1 per cent rise in food prices was the major contributor to the inflation jump with rises also in meat, alcohol, fuel and car prices.

But a 20 per cent rise in vegetable prices after floods in the eastern states last November was the biggest single contributor to the CPI, a one-off factor that won't concern the Reserve Bank too much. Lower excises on fuel and alcohol should also ease pressure on prices this quarter.

The RBA will concentrate on the underlying inflation figure discounted for volatile components such as fresh food in determining whether inflation is being contained within the 2 to 3 per cent target band for the purposes of setting rates.

Of more concern will be the effect of the low Aussie dollar seen in rising car and meat prices. The higher price of imported cars may now be flowing through while increasing export demand for our meat appears to be squeezing domestic supply.

The RBA may be more inclined to wait until June for a better picture of where the economy stands before committing to a further rate cut.