Subdued inflation lifts chance of rate cuts Cost of living ... fruit prices have gone down. A fall in the prices of fruit, furniture and travel has contributed to a lower-than-expected inflation rate, keeping the door open for further rate cuts if the economy weakens. "It was quite surprising because [the first quarter of the year] is generally a quarter of strong seasonal price increases," Citi senior economist Joshua Williamson said. May interest rate cut more likely Mr Williamson said the lower-than-expected rate meant there was an increased chance of a cut to the cash rate in May, or in June after company capital expenditure expectations data is released. The market is now pricing in a 42 per cent chance of a rate cut by the RBA in May. ANZ senior economist Riki Polygenis said she did not believe the subdued inflation figures would alter the Reserve Bank's stance at this time. "The RBA was already very comfortable on the inflation front and has been focusing more on the weakness in non-mining activity and labour market data," Ms Polygenis said, adding that ANZ still expected further rate cuts to occur this year. BT Financial Group chief economist Chris Caton said in the next two weeks before the Reserve Bank meeting on May 7, the central bank would be looking at other domestic indicators as well as movements in the world economy for guidance. It does have to concern itself about the labour market, [but ] we won't get any more news about that until after the next meeting," Mr Caton said. Economist Gabby Hajj from Macquarie Research, which tipped a May rate cut before the inflation figures were released, said the new data gives the Reserve Bank the green light to continuing easing monetary policy. In isolation, maybe this wouldn't have been enough for the RBA to cut. But looking back on what's happened over the month since they met in the beginning of April, you've had unemployment increase, you've had business conditions deteriorate for mining and retail, you've also had consumer confidence fall," Mr Hajj said. The ball is in their court now. We think [the RBA's] best option is to cut in May, and that won't have any inflationary impact given that inflation, once you extrapolate the carbon tax, is sitting at the lower end. The Australian dollar lost about a quarter of a cent to $US1.0245 following the data release. Price rises in pharmaceuticals, but cheaper international travel The highest price rises were recorded for pharmaceuticals (7.6 per cent), tertiary education (6.5 per cent) and tobacco (3.7 per cent). In contrast, international holiday travel and accommodation fell by 5.2 per cent for the quarter, while furniture prices sank by 6.8 per cent and fruit dropped by 7 per cent. Clothing and footwear prices were lower by 3.9 per cent. Economists had expected the headline inflation rate to rise by 2.8 per cent and the underlying rate to lift by 2.4 per cent. In the December quarter, the consumer price index, which takes in commonly bought items, inched higher by 0.2 per cent, as the inflation rate rose to 2.2 per cent in 2012. More to come...