Inflation has fallen within the Reserve Bank of Australia's preferred measure of inflation target band for the first time in more than three years. · AAP Unless the Reserve Bank of Australia (RBA) acts swiftly to cut interest rates, the economy is at risk of seeing growth and inflation getting too low — and unemployment too high. Inflation has well and truly hit the RBA's target band and now we are broaching another dangerous territory.
Urgent and aggressive interest rate cuts are essential. The policy error from the RBA in having interest rates too high for too long is showing up in the inflation result. Based on the quarterly consumer price index, in annual terms for the March quarter 2025, headline inflation was steady at 2.4 per cent while the trimmed mean or underlying inflation rate dropped to a three and a half year low of 2.9 per cent.
RELATED Based on the monthly data, which are superior in showing turning points and momentum in inflation, the annual change to March 2025 for headline inflation was also 2.4 per cent, while the trimmed mean increase was 2.7 per cent. Based on the monthly data, headline inflation has been in the RBA’s target band for eight consecutive months; underlying inflation has been within the target band for four straight months. Recall the RBA target for inflation is 2.5 per cent, the mid-point of the 2 to 3 per cent band.
This is excellent news for the the Australian economy and I would pencil in May 20 for the next interest rate cut. However, there is now a risk that inflation will be too low over the next year to 18 months and as a result, unemployment will be too high. What has happened?
Everyone can remember the inflation shock of a couple of years ago. In annual terms, inflation peaked at 7.8 per cent in the December quarter 2002. Since that peak, there has been a virtual free-fall in inflation which has culminated in today’s results.
Inflation has fallen due to the extended period of subdued economic growth, moderate and sustainable wage increases, an easing in inflation around the world, the ending of supply chain pressures and the effects of persistently high interest rates set by the RBA. The inflation data, along with the myriad of other economic news, show that the current 4.10 per cent cash rate set by the RBA is inappropriate. Grossly inappropriate, in fact, if we are to hope for decent economic conditions including sustained low unemployment and inflation overshooting to 2 per cent or less and strong private sector business investment.
