Wednesday's March quarter consumer price index result is a get-out-of-jail card for the markets, the Reserve Bank and the Australian government as it prepares a budget for 2014-15 that will walk a razor's edge.
The CPI was expected to rise by 0.8 per cent in the March quarter after a higher than expected 0.8 per cent rise in the December quarter. The December quarter increase took annual inflation to 2.7 per cent, close to the top of the Reserve Bank's 2 per cent to 3 per cent medium-term inflation target. A 0.8 per cent rise in the March quarter would have pushed above the target, to 3.2 per cent.
Instead, consumer prices lifted by 0.6 per cent, and by 2.9 per cent over a year. Underlying price measures that the Reserve watches closely rose on average by 0.5 per cent in the quarter, and by 2.7 per cent in a year. The Australian dollar was almost a cent lower at US92.8¢ on Wednesday afternoon after traders digested the news.
If inflation had run as strongly as expected in the March quarter, it would have increased speculation that the Reserve Bank's next interest rate move would be up.
That in turn would have added to the upward pressure on the Australian dollar, and complicated the construction of the 2014-15 budget, which will be handed down by Treasurer Joe Hockey on the night of Tuesday, May 13.
Hockey is walking a tightrope as he attempts to fashion a budget that does not hurt the economy too much this year, but also begins the task of repairing government finances that blew out during and after the 2008-09 global crisis.
His options for cuts and other budget deficit-reducing measures would narrow if rates were more likely to increase later this year, because rate rises would double-down on budget cuts by also pressuring economic activity.
The dollar-denting impact of the CPI result is what will please the Reserve the most. The $A fell from US96.7¢ to US86.7¢ between late October last year and late January this year, a down-shift that boosted Australia's growth prospects.
After the release of the December quarter inflation numbers on January 22 it began to rise, however, to a high of about US94.3¢ on April 10. It was around US93.7¢ ahead of Wednesday's CPI release.
The December quarter CPI result had been out for two weeks when the Reserve Bank board met on February 4 to consider whether or not to move its cash rate, which had been sitting at 2.5 per cent since August after being cut from 4.75 per cent since October 2011. The board left the cash rate unchanged, but in a new comment said that a ''period of stability in interest rates'' was likely.
It said the same thing after it left the cash rate unchanged on March 4 and April 1, and is relying in part on a judgment call that a transition from the mining boom to non-resources growth in the economy is under way, but not yet totally locked in.
Days after its board met in February, the Reserve also issued one of its quarterly monetary policy statements, however, and raised its inflation prediction, from annual rates of between 2 to 3 per cent this year and the year to June 2015 to rates of 2.25 per cent to 3.25 per cent, and from 1.5 per cent to 2.5 per cent in calendar 2015 to 2 to 3 per cent.
Reserve Bank governor Glenn Stevens said late in March that the bank did not see persistent and serious inflation pressures.
Inflation would be a little higher than expected, he told a Hong Kong conference - or at least would be assuming the December quarter CPI result ''conveyed at least some genuine information'', an aside that confirmed that, like some in the markets, the Reserve suspected that the December quarter CPI was at odds with reality.
The fall in the $A that was only partially reversed would import some inflation, he said, but wage growth was low, and the inflation outlook was still within the Reserve's target range.
By lifting its inflation predictions in February the Reserve showed, however, that it was watching the CPI closely. A 3 per cent-plus CPI rise in the year to March would have created competing pressures as the $A rose, to either cut rates to control the dollar, or raise them to control inflation.
The lower than expected result unwinds the tension. The $A is still too high by the Reserve's reckoning and still a weight on economic growth, but Hockey has more room to move as he frames the budget. He may not get the rate cut the government is reported to have let the Reserve know would be useful, but rate rises to control inflation are now not in the offing.
From the Reserve's standpoint, Stevens' call last month that inflation is anchored inside the bank's 2 to 3 per cent target looks good. The central bank has more time to maintain low rates to stimulate economic activity, and restrain the Australian dollar's demand-depressing strength.
Investors meanwhile have dodged the sharemarket retreat that inevitably comes when rate rises are imminent. Interest rates will rise eventually, but the CPI result gives everyone breathing room.
