Australian consumer prices unexpectedly fall

Australia’s core inflation slowed to the weakest on record as headline prices unexpectedly fell last quarter, putting interest-rate cuts back on the table and sending the currency down by more than one U.S. cent.

The Reserve Bank of Australia looks at two core inflation measures -- trimmed mean and weighted median -- and Wednesday’s report showed:

• Trimmed mean CPI rose 0.2% QoQ vs. median forecast of 0.5%

• Weighted median CPI gained 0.1% QoQ vs. median forecast of 0.5%

• CPI fell 0.2%, first decline since final quarter of 2008 vs. median forecast 0.2% rise

Traders tripled bets on a rate cut at the central bank’s Tuesday meeting to 50 percent as pressure mounts on Governor Glenn Stevens to resume easing from the current record-low 2 percent after a year-long hiatus.

In the first three months of this year, the local currency climbed more than 5 percent, hampering policy makers’ efforts to rebalance the economy in favor of service industries like tourism and education.

“A pre-emptive May cut is surely now a real possibility,” said Gareth Berry, a foreign-exchange and rates strategist in Singapore at Macquarie Bank Ltd. “At the latest, an August cut is now inevitable. That spells the end of this three-month old Australian dollar rebound, and the downtrend can now resume in earnest.”

The Australian dollar plunged following the data and traded at 76.61 U.S. cents at 12.36 p.m. in Sydney from 77.63 cents before the figures were released. Traders are pricing in a 50-50 chance of a rate cut on Tuesday, up from 14 percent on Tuesday.

Today’s report also showed quarterly deflation of 1.4 percent for tradable goods, which are affected by the currency and other international factors, and a 0.4 percent increase for non-tradables goods, which are impacted by domestic variables.

Key headline price losses and gains were:

• Automotive fuel dropped 10% QoQ and fruit prices declined 11.1%

• Secondary education advanced 4.6% QoQ and pharmaceutical product prices rose 4.8%

Jobs Growth

The central bank is trying to kick start a revival in industries outside mining, where an investment boom is half way through unwinding.

A depreciation of the currency in 2015 aided that effort: the economy recorded its best quarter of jobs growth on record in last year’s final quarter and unemployment dropped to a 2 1/2-year low in March.

The RBA attributes some of the stronger labor market outcomes to very low wage gains that are also constraining inflation.

The statistics bureau also released year-on-year numbers for consumer-price growth. The RBA targets annual inflation of between 2 percent and 3 percent on average, meaning it will tolerate periods outside that range.

• Trimmed mean CPI rose 1.7%, a record low vs. median forecast of 2% gain

• Weighted median CPI climbed 1.4%, also a record low vs. forecast 1.9% increase

• Headline CPI rose 1.3% vs. forecast 1.7% rise

“Whereas the RBA was previously thinking that low inflation would allow it to cut interest rates if demand faltered, it is now clear that low inflation itself is the problem,” said Paul Dales, chief economist for Australia and New Zealand at Capital Economics.

“An inflation-targeting bank like the RBA can’t ignore such a big undershoot of underlying inflation.”