Cheaper fuel, fruit to dampen inflation

Tumbling fuel and fruit prices are likely to have kept a lid on inflation in the first few months of the year, leaving room for a rate cut by the central bank.

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The Consumer Price Index (CPI) is expected to have risen 0.25 per cent in the March quarter for an annual rate of 1.77 per cent, according to an AAP survey of 10 economists.

Underlying inflation, which strips out the effects of volatile price movements, is forecast to have been at 0.5 per cent in the quarter and 1.95 per cent over the year.

The data will be released on Tuesday by the Australian Bureau of Statistics.

Petrol prices, which dropped 11 per cent on average between January and March, have maintained significant downward pressure on headline inflation, NAB economists said.

With evidence that refining margins remain elevated, fuel prices are unlikely to prove a driver of inflation in the coming months.

“Even if global oil prices settled at current prices, any narrowing of refining margins the quarter ahead could see petrol prices continuing to weigh on headline inflation in 2016,” NAB economists said in a note.

Small increases in vegetable prices, led by broccoli, carrots and lettuce, have also been significantly offset by large falls in fruit prices.

The NAB economists estimate wholesale prices for bananas dropped 28 per cent in the March quarter, while mangoes fell 20 per cent and strawberries were nearly 10 per cent lower.

Like fuel, there are indications fruit prices will continue to slide.

“We acknowledge that this has some downside risks given wholesale prices are suggestive of a 30 per cent fall in fruit prices in average,” they added.

Westpac economist Justin Smirk said the Australian dollar’s fall in the early months of 2016 may also be a factor in subdued inflation.

“We expect the seasonal fall in clothing and footwear, household contents and recreation will be somewhat less than it usually is,” he said.

CommSec economist Savanth Sebastian said the forecast tame inflation would leave the door open to a cash rate cut, if needed.

“A mild result should ensure that the Reserve Bank sticks to its easing bias, however a significantly lower inflation result would be needed to trigger a May rate cut,” he said.