The Consumer Price Index rose by just 0.1 per cent in the March quarter to be 1.6 per cent higher on the year.
But the underlying measure -- the key measure which the Reserve Bank board looks at when considering monetary policy --is up by only 2.1 per cent. That's at the very bottom of its 2 -3 per cent comfort band and is in fact, at the lowest level in two-and-a-half years.
The biggest price rises for the quarter came from pharmaceuticals (+14.4%), secondary education (+7.7%) and tertiary education (+4.7%)
But they were more than offset by massive falls in fruit prices (-30.0%) visual and computing equipment (-6.3%) and furniture (-6.0%).
"Banana prices fell about 60 per cent driven by favourable growing conditions and a recovery from shortages as a result of Cyclone Yasi early last year, " St George Chief Economist Hans Kunnen says.
"A raft of items have recorded the biggest annual price declines on record, including food, personal care, newspapers, books, stationary, snacks and confectionary, Commsec's Craig James says.
"Car prices have fallen to the cheapest levels in 24 years."
The falls in TV, computer and furniture prices are a testament to just what a difficult time it is for Australian retailers.
They now have to sell more items to make a profit because prices are down.
"The sluggishness in the domestic economy has ensured that businesses continue to absorb any increases in costs, while the strength of the Australian dollar continues to keep imported prices low. In addition the uncertainty and downside risks to the global economy have resulted in subdued commodity prices in recent months, " Craig James says.
What concerns Justin Smirk at Westpac the most is a rare 0.1 per cent fall in house purchase prices.
"We understand that food prices are likely to reverse in Q2 but falling house prices suggest something more fundamental is underway," Mr Smirk said.
The data all but confirms an interest rate cut next month.
"Today's number puts a May rate cut beyond doubt," Westpac's Bill Evans says --due to lower than expected house purchases, utilities and education.
“The rare negative read on house purchase emphasises the perilous state of the housing construction sector and certainly that sector's need for some interest rate relief," Mr Evans added.
Craig James believes rates will be cut by at least a quarter of a per cent in May.
"There is the risk that the Reserve Bank cuts rates by half a per cent, but we expect the Bank to remain conservative. The RBA is still wary about the huge income flowing in from resources."
Robert Henderson from NAB agrees ta May rate cut is very likely.
"The politics currently surrounding monetary policy suggests the 'hard heads' at the RBA will not be able to resist calls for a cumulative cut of 50bps and perhaps more after that. Hence, today we are adding an additional 25bps cut to our forecasts for June," Mr Henderson said.
Clifford Bennett from 'The White Crane report' is more damning, saying the RBA has badly misjudged the economic reality for quite some time.
"There is zero justification for the high official interest rates we have in this country."
He believes the Reserve misjudged the benefit of the resources boom on Australia's economic growth, especially the flow on effects to other sectors.
“The Reserve Bank has further crippled the Australian economy through forcing the Australian dollar higher that it would otherwise have been, via again its penchant to keep rates higher than they need to be," Mr Bennett added.
He's calling for the central bank to slash the official cash rate by 50 basis points next Tuesday. It's a sentiment shared by a number of investment banks, including economists at Barclays Capital.
The major negative with a 50 basis point cut would be that it may provoke a sense of panic and policy error.
In a note Barclays conceded that "the market has 100bp of easing priced in by year-end. While 100bp of easing is not outside the realm of possibility, we believe it remains aggressive given the weakening in the global macroeconomic backdrop we have seen over recent months."
Shane Oliver from AMP Capital expects cuts in May, June and probably also around August/September.
"Given ongoing global uncertainties, the softness in the economy, borrower caution, a circa $40bn turnaround in the budget for the next financial year and a benign inflation outlook, interest rates should fall between 0.75 per cent and 1 per cent over the next six months.," Mr Oliver said.
But he wants to see a 50 basis point cut next week to "ensure a decent cut in mortgage rates, given the ongoing uncertainty as to how much the banks will move by and their independent rate hikes so far this year."
Clifford Bennett says there's no excuse for Australia's lenders not to cut borrowing costs.
"As the rest of the world continues to prosper, at a rate far exceeding our own stalled economy, overseas funding costs will continue to moderate as markets price out any risk of the European crisis continuing. At the same time our Reserve Bank will be forced to reduce domestic funding costs. The combined result should see all the major banks reducing mortgage rates over the next few months, as there simply will be no excuse not to."
The ANZ may have jumped the gun with its 6bps rate increase a fortnight ago, at a time when the rest of the banks sat on their hands. While the increase will benefit its bottom line in the short-term, the fact that the other banks held back may hit its brand, especially if it is forced to reverse its decision when rates are cut next month.
The Reserve Bank board meets on Tuesday, May 1st.
