March quarter inflation data
The March quarter inflation data had generally increased confidence in the forecast that underlying inflation would pick up to around 2 per cent by early 2018.
Both headline and underlying measures of inflation had been ½ per cent in the March quarter. In year-ended terms, headline inflation had been a little above 2 per cent and underlying inflation had increased to around 1¾ per cent.
Prices of tradable items (excluding volatile items) had been little changed in the March quarter but fell over the prior year. Strong competitive pressures in the retail sector had helped keep retail inflation low and there were signs that these pressures were affecting a broader range of consumer goods, such as furniture and household appliances. The appreciation of the exchange rate over the prior year is likely to have weighed on consumer prices.
Working in the other direction, low wage growth and strong competition in the retail sector had contributed to domestic cost pressures remaining subdued. Rent inflation had remained persistently low and was around its lowest level in over 20 years, partly because rents had fallen significantly in Perth.
Inflation in a range of administered prices, such as those for education, child care and pharmaceuticals, had been lower than usual, largely reflecting changes in government policy and the benchmarking of some administered prices to the CPI.
GDP growth over 2016 had been around 2½ per cent. Data that had become available over April suggested that the domestic economy had continued to expand at a moderate pace in the March quarter.
The impact of Cyclone Debbie had been most apparent in the spot price of coking coal, which had increased sharply after damage to key infrastructure affected coking coal exports from the Bowen Basin. Coking coal export volumes were expected to be significantly lower in the June quarter before returning to their previous levels over the remainder of 2017 as the damaged infrastructure is restored.
Although Australia's terms of trade were expected to be higher in the near term than had been forecast at the time of the February Statement, much of the increase in the terms of trade since mid 2016 was expected to unwind over the next few years. As such, the recent rise in the terms of trade was not expected to result in materially more mining investment.
Recent data on retail sales growth and households' perceptions of their personal finances suggested that consumption growth had moderated somewhat in early 2017.
The large amount of residential construction still in progress was expected to support dwelling investment in the near term. Building approvals had been lower over prior months, particularly for higher-density dwellings, suggesting that this pipeline of construction work would continue to be worked off in coming quarters.
Growth in housing prices had remained brisk in Sydney and Melbourne, where population growth had been relatively strong, but had been weak in Perth, where population growth had fallen significantly following the end of the mining investment boom. At the same time, there had been some indications that the large increase in supply in the inner-city Melbourne and Brisbane apartment markets had weighed on prices, particularly in the case of Brisbane.