The CPI print revealed that disinflationary forces intensified in the March quarter. Underlying inflation (which Evidente calculates as the average of the weighted median and trimmed mean estimates) posted a quarterly rise of only 0.18%, the smallest increase since the inception of the series in 1982. As a result, underlying inflation rose by only 1.5% in the past four quarters, which also represents the smallest annual increase on record (see chart).
In the past four quarters, the price of automotive fuel has dropped by 10%. Some would argue that the precipitous decline in crude oil prices have added to the Australia's disinflationary impulse in the past year. This is certainly true of the headline CPI. But the methodologies underpinning the RBA's preferred underlying measures - the trimmed mean and weighted median estimates - reduce the influence of outliers. The disinflation is widespread; of the approximately 284 sub-categories covered by the Australian Bureau of Statistics, 106 or 40% posted outright declines in the past year.
The annual rate now undershoots the bottom end of the RBA's target range by 50 basis points. Long admired as one of the few central banks that had continued to meet its inflation target since the financial crisis, the RBA now joins the not so exclusive club of developed world central banks that are struggling to meet their inflation targets.
Despite the 50% plus drop in the RBA's Commodity Price index since global commodity prices peaked in mid-2011, the fact that the annual rate of underlying inflation has remained at or above 2% for most of the past six years owes much to an acceleration in population growth and significant Australian dollar depreciation. The effects of these two developments have waned more recently; population growth has slowed and the Australian dollar is around 10% higher from its low in late 2015. Combined with record low growth in wages and unit labour costs (which are productivity adjusted wages), this could herald the start of an extended episode of sub-2% inflation.
The record low underlying inflation outcome confirms that the Australian economy continues to suffer from a shortfall in aggregate demand and is consistent with what Evidente has described as the four year long income recession.
RBA Governor, Mr Glenn Stevens, has developed a persona as the reluctant rate cutter in recent years. In a recent speech, he re-iterated his view that the potency of monetary policy diminishes at low interest rates and once again endorsed the role of structural reforms to boost growth. Evidente welcomes policies that seek to further de-regulate labour and product markets. But surely the role of a central bank is to revive animal spirits at a time when the psychology of risk taking in corporate Australia is muted.
A key obstacle to lower interest rates in the mind of the RBA for a while had been the strength in housing. But in its latest minutes, the central bank acknowledges that the tighter prudential standards in the past year had contributed to a moderation in conditions in the established housing market. The RBA added that it would also closely monitor whether the strength in labour market conditions from late last year. Mr Stevens would therefore have drawn some comfort from the solid March labour force survey released earlier this month. But the growing shortfall in aggregate demand evident implied by the record low March quarter CPI print points to the prospect of a slowdown in employment growth.
Against this backdrop, Evidente re-iterates the view that the RBA Board should deliver monetary stimulus at its next meeting on May 3rd.