Ignore plunge in headline inflation, fret about the core

We expect the consumer price data for the first quarter to show that headline inflation fell to 1% in Australia and to almost zero in New Zealand. Since these falls are due to the one-off effects of the drop in petrol prices, they won’t permanently reduce inflation expectations and headline inflation in both economies will rebound just as sharply early next year. That said, it is the benign outlook for underlying or core inflation that underpins our forecasts that interest rates in both Australia and New Zealand will fall further this year than the markets currently expect.