The March quarter CPI result showed a sticky inflation and higher than expected results for both the quarter and the month – but it wasn’t all bad news. The inflation that remains in the system seems mostly to be echoes of the inflation seen
in 2023, not new inflation. The “last mile” can be hard to overcome, however.
The recent March quarter CPI result was higher than hoped. The headline CPI result rose 1.0% on the quarter and 3.6% on the year. The annual result was a material drop from the previous result of 4.1%.
If we only look at the CPI using the headline result, then things would look fairly good. The annual result has fallen again to 3.6%. The problem is that the final part of CPI can be hard to temper – a problem known as the “last mile”.
The last mile can be hard to conquer because there are lots of feedback loops in CPI. As soon as inflation rises dramatically in one part of the economy, all the relative pricings in the economy are put out of whack. It’s not until the burst of
inflation itself, and all the subsequent relative pricing changes have stabilised that inflation has truly been subdued. This most recent CPI print had two excellent examples of this mechanism: one from Housing and one from Education.
First, the impact from Education. It is important to notice that Education is only measured in the CPI once per year. After a year like 2023 with high inflation, it isn’t a surprise that there was inflation in the cost of education too. Some of
this is inferred, like the costs of primary and secondary schools, but some of it is direct indexation, like in tertiary education fees. Either way, the strong contribution to the final result from education can be seen as a lagged effect of inflation
in 2023, not as a new round of inflation breaking out.
Because Education is only measured once per year the quarterly CPI in the remainder of 2024 will not be influenced by education price changes.
Second, the impact from Housing. The major contributor here was rent. Rent rises can be measured in advertised terms or CPI-terms. The CPI measures the average amount paid as rent, not the amount that would need to be paid to take on a new lease. When
rent is rising quickly the advertised rent rises much faster than the average rate of rent paid since many renters have existing leases. Over time, the average rent will rise to incorporate a spike in rent as the old leases are replaced with new ones.
As a consequence, CPI-measured rent tends to lag well behind the advertised rent in the marketplace. Unfortunately, although rent as measured in the CPI is now growing slightly less quickly (once the government policy effects are stripped out) the
long lag in rental prices will hold likely hold CPI high for many quarters to come.
These lagged effects are keeping inflation higher than we might have hoped by now. However, the falls so far are the easy part. The annual change in CPI can be thought of as the sum of four quarterly CPI prints. (Technically it’s a multiplicative
relationship, but the sum is very close.) This means that when each quarter’s CPI result is released the annual rate loses the impact from the old result now five quarters ago and that is replaced by the impact of the most recent quarter. In
March 2024, the new March 2024 result of +1.0% displaced the March 2023 result of +1.4%. That 0.4% difference, give or take some rounding, is why the annual rate dropped 0.5%.
The problem is that from now, the success seen mid and late 2023 is a hurdle to overcome. The June quarter 2023 result was +0.8%, meaning any result in June quarter 2024 must be below 0.8% to see the annual result drop further. The last mile is hard.
The other place we can look for good news in the CPI is in the goods and services split. The services prices had been lagging the headline and goods CPI. While this is still true, the trajectory for inflation is now clearly downwards in both major categories.
The news on Tradable vs Nontradable was not as encouraging, but possibly better than might have been feared. Tradable inflation is inflation in goods where international prices create most of the changes in prices. Nontradable inflation is therefore inflation
where most of the effect is domestic. As with goods and services, both tradable and nontradable inflation is now clearly on a downward trend. The nontradable inflation is lagging the tradables, but both are heading downwards. We should note that both
rent and education would be nontradable items, so the arguments above about the stickiness of CPI being mostly an echo of 2023 rather than a new spike apply to this subcategory too.
Conclusion
The RBA seems to share our reasonably benign view of the unexpectedly high inflation print in March. At the May board meeting and Statement on Monetary Policy the RBA raised their forecasts for CPI in the short-term but left their forecast for December
2025 in place at 2.8%. Moreover, the RBA emphasised that the path to lower inflation would not be smooth - suggesting they view the surprise as a small deviation and a result of the 2023 spike, not as a fundamentally new trend.