Temporary fall in inflation won't ease RBA fears

Economists at NAB, CBA and ANZ are tipping the consumer price index to drop from the 4.6 per cent annual rate clocked in March when fresh figures are released by the Australian Bureau of Statistics on Wednesday.

That's largely because of a temporary reduction in fuel taxes, rather than a softening in the underlying impulse.

Petrol prices fell about nine per cent over the month but because diesel prices still rose, NAB senior economist Taylor Nugent has pencilled in a seven per cent fall in automotive fuel.

He therefore expects headline inflation to fall to 4.4 per cent for April, driven by the 32c per litre reduction in fuel excise.

"That will add to headline inflation in July when the excise cut unwinds," Mr Nugent said.

Economists at ANZ and CBA expect an even larger drop in the consumer price index to 4.3 per cent in April, although Westpac predicted an annual rise of 4.8 per cent.

"Lower public transport fares in some states are also expected to weigh modestly on the monthly outcome," said CBA economist Trent Saunders.

Underlying inflation, which excludes volatile price movements, will likely tick up to 3.4 per cent from 3.3 per cent, supported by higher new dwelling costs and a larger bump in private health insurance premiums, he said.

"The key risk for April is how much businesses have passed on higher costs, particularly for new housing."

The pace and breadth of cost pass-through has troubled the Reserve Bank as it faces a devilish dual-edged dilemma of rising inflation and stagnating activity.

Despite markets reacting positively to commentary out of the White House suggesting an end to the Iran war is nigh, there has been little progress.

While Hormuz remains effectively shut to freight, oil stockpiles will continue eroding and shortages of other vital commodities like fertiliser will keep mounting.

CBA commodity analyst Vivek Dhar warned oil futures could rise from $US105 a barrel to about $US150 by mid-June if the status quo remained. By September it could be $US200.

That would be catastrophic not only for consumer prices. By then, the RBA might be more concerned about the hit to economic activity and employment.

The labour market showed its first signs of softness last week, with unemployment rising from 4.3 per cent to 4.5 per cent in April.

Another sign of the hit from the Middle East conflict could come on Thursday, when the ABS releases household spending figures.

ANZ economist Aaron Luke expects a 1.3 per cent month-on-month contraction in April, following a 1.6 per cent rise in March.

While much of that will be down to lower fuel prices and free public transport, discretionary spending is also expected to have softened.

Carolyn Hewson will deliver the first speech by an external member of the Reserve Bank's rate-setting board on Wednesday but probably won't give away much on rates.

Her Adelaide University address will consider responsibility and leadership in public service and economic decision-making.

US Secretary of State Marco Rubio flagging progress toward a deal with Iran has meanwhile been enough to raise Wall Street enthusiasm.

The Dow Jones Industrial Average on Friday rose 294.04 points, or 0.58 per cent, to 50,579.70, a record closing high.

The S&P 500 climbed 0.37 per cent to 7,473.47 and the Nasdaq Composite  0.19 per cent to 26,343.97.

Australian share futures lost 58 points, or 0.66 per cent, to 11,542.

The S&P/ASX200 rose 35.3 points on Friday, up 0.41 per cent to 8,657, as the broader All Ordinaries improved 36.4 points, or 0.41 per cent, to 8,877.2.