The TD Securities – Melbourne Institute Monthly Inflation Gauge, released today,  rose by 0.5 per cent in March, following a 0.1 per cent increase in February and a 0.2 per cent increase in January. In the twelve months to March, the Inflation Gauge increased by 1.8 per cent, the lowest annual inflation rate in two years.

Contributing to the overall change in March were price rises for holiday travel and accommodation, alcohol and tobacco, and automotive fuel. These were offset by price declines in meat and seafood, housing, and clothing and footwear. The price of automotive fuel rose by 3.5 per cent in March.

The trimmed mean of the Inflation Gauge rose by 0.3 per cent in March, to be 1.9 per cent, back below the bottom of the RBA two to three per cent target band.

According to Annette Beacher, Head of Asia-Pacific Research at TD Securities, “With this March report we have finalized our CPI forecasts for the March quarter, and it is clear that while prices were sticky in the first few months of 2012, much of this can be accounted for by seasonality, hence annual inflation rates are expected to continue to decelerate. We forecast headline inflation to increase by 0.7 per cent, to be 2.2 per cent higher than a year ago, the lowest annual outcome since December quarter 2009. We forecast underlying inflation to increase by 0.5 per cent in the quarter, but this lowers the annual rate from 2.6 per cent to 2.3 per cent.”

“While expectations for a near-term rate cut have been re-ignited, we cannot identify clear triggers for the RBA to recommend a rate cut tomorrow, as lower inflation, lingering global risks and contractionary fiscal policy are slow burn issues, not smoking guns. We expect the RBA to remain relaxed and comfortable as neutral monetary policy is consistent with the Bank’s forecasts for trend growth and trend inflation over the medium term. We expect the RBA to reiterate its conditional commitment that “Should demand conditions weaken materially, the inflation outlook would provide scope for easier monetary policy”. We still lean towards two 25 basis point rate cuts in the coming months, for a target of 3.75 per cent.” added Ms Beacher.