What inflation means for the RBA in May

Most economists predict today's CPI to fall below the RBA's target band, opening the door to a May rate cut, but the possibility of revisions to last year's data could throw a curveball.

With so much talk about today's ABS inflation data and the potential ramifications this will have for the Reserve Bank's rates decision at its May board meeting, I thought I would pull together my own 'cheat sheet'. 

In brief, this guide combines the March quarter core inflation numbers with the inflation measured over the preceding three quarters to give a March 2012 year-on-year result. The Reserve Bank has become increasingly wary of historical revisions to the ABS's underlying inflation data (known as the "trimmed mean" and "weighted median"), and it is likely to place significant emphasis on the broader results over the last six and 12 months. 

By way of background, the RBA has worked hard to prepare the public and financial markets for a cut in May subject to the outcome of the March price data. Predicting a cut if inflation prints low is easy. The much more difficult challenge was anticipating the RBA's decision to hold rates steady in February, March, and April, which caught some experts unawares. 

Of the 22 economists polled by Bloomberg (I have also added in economist Stephen Koukoulas), none are predicting an especially high core ("trimmed mean") inflation print: the maximum quarterly estimate is 0.7 per cent from Credit Suisse, JP Morgan, and Nomura (see the first chart below). At least seven economists are expecting a relatively low core inflation number of 0.5 per cent. Given the currency appreciation, declining import prices, weak producer prices and various surveys pointing to benign retail prices, it's possible that inflation is assessed to be even lower than 0.5 per cent.

Click to enlarge

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