A sharp cooling in inflation, with record price falls in some consumer items, has left the door wide open for the Reserve Bank to reduce interest rates next week and even fuelled calls for a deep cut of half a percentage point.
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With help from a strong Australian dollar, the March quarter had the slowest annual pace for inflation since 2009, during the global financial crisis, and the third softest increase in about 13 years.
A breakdown of the eight capital cities by the Australian Bureau of Statistics showed Canberra and Adelaide were the only two cities to experience a fall in the consumer price index in the quarter.
It was the first quarterly decline for Canberra since December 2008, a time when the CPI fell across the eight cities just several months after the collapse of US investment bank Lehman Brothers.
Nationally, the CPI rose just 0.1 per cent in the quarter, compared with the previous quarter, taking the annual speed of inflation to 1.6 per cent, or nearly half the 3.1 per cent in the December quarter.
Annual inflation is now below the RBA's target bank of 2-3 per cent.
Fruit prices tumbled 30 per cent overall for the quarter, with bananas sliding 60 per cent as supplies improved following the shortages caused by Cyclone Yasi in Queensland in February 2011. Poultry prices also fell, along with domestic travel, TVs, computers, furniture, clothing and footwear.
Treasurer Wayne Swan said the slowdown in inflation was a reminder of Australia's strong economic fundamentals but ''we do know that many households are doing it tough''. Rises for the year in electricity, gas, water and sewerage, childcare and petrol stoked the debate over the cost of living.
Federal opposition treasury spokesman Joe Hockey said the cost of key household items continued to outstrip average incomes.
Still, Commsec chief economist Craig James said a raft of items, such as fruit, vegetables and personal care, had their biggest annual prices declines on record.
St George Bank chief economist Hans Kunnen said the data reflected a softer economy and a strong Australian dollar.
But a key risk was domestic-sourced inflation. ''It lends itself to a rate cut on May 1. Fifty basis points? No, stick with 25 basis points, because there is always the opportunity to do more later if need be,'' Mr Kunnen said.
The Housing Industry Association called for a cut of 50 basis points. ''That would, admittedly, be a bold move for the RBA, but it would be entirely appropriate given the pulse of the Australian economy is not beating as fast as the bank earlier expected,'' HIA chief economist Harley Dale said.
