The Q1 CPI was lower than the market and I expected at +0.6% qoq, +2.9% yoy. The two main underlying inflation measures were also lower than expected +0.5% qoq and +0.6%, +2.6% yoy and +2.7% yoy respectively. The components contributing most to the undershoot were housing, up 0.6% in the quarter (I had 1.1% pencilled in) and unexpected and quite pronounced deflation in clothing and footwear, -2.1% in the quarter, and household equipment and operation, -1.5%. Quite high inflation was evident in tobacco and alcohol, up 2.9% qoq; education up 5.1%; health up 2.6%; and transport up 1.1%. The RBA will be relieved that the CPI was not as high as expected and it provides the option of leaving the cash rate at 2.50% for longer. We still see a high inflation reading for Q2, due in late July, but it will probably need two relatively high CPIs to convince the RBA of the need to act. We are pushing out our call of a first 25bp rate hike from August to November.