The 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 2014-2015 that needs to very finely balanced.
The CPI was expected by the market 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 inflation target. A 0.8 per cent rise in the March quarter would have pushed annual inflation to 3.2 per cent, above the target.
The CPI rose by only 0.6 per cent in the March quarter, however, and by 2.9 per cent in the year to March – still underneath the 3 per cent upper limit of the Reserve Bank's inflation target.
The average of two other consumer price measures closely watched by the Reserve Bank, the trimmed mean and weighted median, rose by 0.5 per cent and 2.65 per cent in the year, comfortably below the central bank's 3 per cent upper limit.
A fall of almost half a US cent in the value of the Australian dollar summed up the relief over 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 upwards.
That in turn would have added to the upward pressure on the Australian dollar. It fell from 96.7 US cents to 86.7 US cents between late October last year and late January this year, a down-shift that pleased the Reserve.
After the release of the December quarter inflation numbers on January 22 it began to rise however, to a high of about 94.3 US cents on April 10. It was still strong at 93.7 US cents immediately before the 11.30 AM release of the March quarter inflation numbers.
The Reserve announced that its cash rate was on hold days after the release of the December quarter inflation result. It has been saying since then that rates seem set for a period of stability mainly because it sees signs that the transition from the mining boom to non-resources growth in the economy is underway, but also recognises that the process is not locked in.
Reserve Bank governor Glenn Stevens said late in March that the central bank did not see persistent and serious inflation pressures as the change occurred, despite the strong December quarter inflation result. Inflation would however have moved more squarely onto the Reserve's radar screen if its 3 per cent upper limit target for annual inflation hade been breached by the March quarter CPI result. The odds on a rate rise later this year would have shortened.
A higher likelihood of a rate rise later this year would in turn have pressured the construction of the 2014-2015 Budget, which will be handed down by 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 2008-2009 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 also place downward pressure on economic activity.
Now that the result is out, the multiple, related pressures are eased, at least for the time being. That was reflected in the quick fall in the value of the $A, although it remains worryingly high, and a weight on economic growth.
Hockey has more room to move as he frames the government's first Budget. The Reserve Bank has more time to use low rates to stimulate economic activity, and restrain the Australian dollar's demand-depressing strength: and investors have dodged the sharemarket retreat that inevitably comes when rate rises become more likely. Rates will rise, sometime. The latest inflation result does however give everyone breathing room.