The inflation worm has turned

The recent rises in underlying inflation suggest that the period of extremely low inflation in both Australia and New Zealand has come to an end. Underlying inflation, which excludes the temporary influence of the most volatile items, rose from 1.5% to 1.8% in the first quarter in Australia and in New Zealand it held onto the previous rise to 1.6%. This implies that the inflation worm has finally turned up. This explains why we no longer expect the Reserve Bank of Australia to cut interest rates from 1.5% to 1.0%, although interest rates are still more likely to fall this year than rise.