Tim Hext: Inflation data shows Australia is in pretty good shape with reasons to be optimistic

Australia’s March-quarter inflation data signals good news for Australia’s economy in 2025, says Pendal’s head of government bonds TIM HEXT  

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AFTER a chaotic April, it was great to focus on the Australian economy again following the release of today’s inflation data.

The March-quarter data showed all inflation indicators within the Reserve Bank’s target zone of 2% to 3%: headline at 2.4%, underlying (trimmed mean) at 2.7%, and the April monthly indicator at 2.4% year on year.

More importantly, services inflation – largely domestically driven and two-thirds of the inflation basket – has fallen to 3.7% from its 2023 peak of 6.25%. Goods prices remain below 2%, having corrected far quicker in 2023 than services.

The good news

In terms of detail in the inflation release, let’s start with the good news.

The two main culprits of very high inflation a few years ago are now well behaved.

Prices on new dwellings (7.6% of the CPI basket) fell for a second quarter. This is measured by costs of new project homes, where there is evidence of discounting.

Given the housing shortage though, this may be as good as it gets.

Rents (6.6% of the CPI basket) grew at 1.2% and are now growing at a more manageable annual rate of 5%.

Also keeping a lid on inflation were further falls across a wide range of goods. Clothes, footwear, household items and computing equipment all had decent price declines.

Finally, international travel prices fell almost 8% in the quarter, partly a roll back of pre-Christmas price hikes.

The not-so-good news

On the not-so-good news side of the ledger, electricity prices are rising once again, as subsidies roll off (CPI is measured on a net of subsidies basis).

Prices increased 16% over the quarter and will continue to rise as other subsidies expire.

Education prices were up over 5% as private schools, as always, took the opportunity to hike fees more than 6% for this year.

Education, health, insurance and council rates largely only change annually. This is all great news for the new government and the Reserve Bank.

Interest rate relief should be a consistent theme throughout the year, with cuts in May, August and November likely.

This would leave cash rates at 3.35% by year-end, around the level considered to be neutral or “natural” through the cycle.

Markets still have more than 1% of cuts, so short end bonds are vulnerable to slightly higher yields near term. Longer-dated yields should remain supported by lower yields offshore.

By year-end, the economy should be growing near trend at 2.5%, unemployment at a still-low 4.25%, underlying inflation should be near the 2.5% target, and wages should be growing around 3.25%, allowing for modest cost of living relief.

What’s not to like?

Clearly, offshore developments will remain the big story in May. Whether global developments bring new shocks to the market remains the risk.

But beyond all the noise, the Australian economy is in pretty good shape with reasons to be optimistic in 2025.

The shocks of Covid have fully passed through inflation, wages, employment and GDP, and normal transmission has been restored – at least for now.

Learn more about Tim in his latest Pendal profile interview, as he explains why the case for bonds – and active management – has never been stronger.

explains why the case for bonds – and active management – has never been stronger

About Tim Hext and Pendal’s Income & Fixed Interest boutique

Tim Hext is a Pendal portfolio manager and head of government bond strategies in our Income and Fixed Interest team.

Tim has extensive experience in banking, financial markets and funding including senior positions with NSW Treasury Corporation (TCorp), Westpac Treasury, Commonwealth Bank of Australia, Deutsche Bank, Bain & Co and Swiss Bank Corporation.

Pendal’s Income and Fixed Interest boutique is one of the most experienced and well-regarded fixed income teams in Australia.

The team won Lonsec’s Active Fixed Income Fund of the Year award in 2021 and Zenith’s Australian Fixed Interest award in 2020.

Find out more about Pendal’s fixed interest strategies here

About Pendal

Pendal is a global investment management business focused on delivering superior investment returns for our clients through active management.

In 2023, Pendal became part of Perpetual Limited (ASX:PPT), bringing together two of Australia’s most respected active asset management brands to create a global leader in multi-boutique asset management with autonomous, world-class investment capabilities and a growing leadership position in ESG.

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