Daily Commentary BY THE CURVE TEAM –

Inflation Underwhelms

29th of April, 2021

CPI for Q1 will have implications for the RBA’s policy decision.

Headline inflation was 0.6% for the quarter, the trimmed mean for the quarter was 0.4% and the annual headline figure was 1.1%. The quarterly headline figure was lower than the 0.9% expected.

Many components underwhelmed. Notably housing, which has seen suppressed prices from the HomeBuilder, was up only 0.1%.

The two main components that drove the small rise were fuel prices, which contributed 0.3 percentage points to quarterly inflation and was up 8.7% for the quarter. Heath was the other component, contributing 0.13 percentage points to quarterly inflation and up 2.1% for the quarter.

Broadly though, prices remain very subdued. Next quarter a large spike in annual inflation is expected due to the drastic drop in prices in Q2 last year, so the recovery over the 12 months from that low will see a lift.

The ending of homebuilder should also help lift prices. This will be transitory though, so until there is a more broad based rise in prices, especially related to wage growth, then the RBA will be reluctant to tighten policy.

Markets did react to inflation, but only slightly, with yields on the November 2024 Australian Government bond down slightly to around 0.30%. This bond is significant, because if the RBA extend Yield Curve Control (YCC), they will aim to have the November bond at 0.10% rather than the April bond. The current yield of 0.30% suggests that markets do not expect the RBA to extend YCC.

Josh Stewart

Associate - Money Markets