After more than three years, Australia's underlying rate of inflation has a two in front of it again. This week's release of the March quarter 2025 Consumer Price Index (CPI) reported that the annual rate of headline inflation remained unchanged from the December quarter at 2.4 per cent. That marked a third successive quarter of within-target band inflation. The RBA has indicated it will pay more attention to underlying inflation than the headline rate - the latter being influenced by changes in government policies around cost-of-living relief. This means the bigger news this week was the annual rate of trimmed mean inflation had eased to 2.9 per cent. That was the first sub-three per cent result for this measure since the December quarter 2021.
In fact, both headline and underlying inflation numbers came in a little bit above market consensus. In normal times, that slight overshoot might have been interpreted as strengthening the case for the RBA remaining on hold for a little longer and leaving the cash rate target unchanged at its upcoming meeting this month. But these are not normal times. Instead, the world economy continues to be roiled by trade policy uncertainty triggered by the second Trump administration in the United States. Recent weeks have brought more evidence of the disruptive impact on trade flows in the form of an import-driven contraction in US first quarter GDP, slumping Chinese export orders and falling US port activity. Meanwhile, the IMF has slashed its forecast for US growth this year by one percentage point and downgraded its outlook for global growth by half a percentage point. The Fund has also trimmed its forecast for Australian economic growth in 2025 by the same half percentage point.
The combination of continued progress on the inflation front with the ongoing deterioration in the international economic environment means the RBA's cautious pre-Liberation Day stance toward prospects for further monetary policy easing is no longer appropriate. Instead, the central bank's new Monetary Policy Board is likely to deliver another rate cut this month as Martin Place looks to take out insurance against an adverse external growth shock.
More detail on this week's inflation numbers, recent trade policy developments, the latest IMF forecasts and the RBA's evolving inflation views below.
