The Australian dollar has taken another hit after inflation evaporated in the March quarter, boosting chances of a Reserve Bank interest rate cut.

Annual inflation slowed to 1.3 per cent for the 12 months to March 31 after the consumer price index showed zero growth in the quarter, falling well short of the already weak 0.2 per cent expected by the market.

Indeed.com economist Callam Pickering said the data pointed to deep underlying issues across the Australian economy, and created a compelling argument for the RBA to cut the cash rate to a new record low in May.

Sarah Hunter from BIS Oxford Economics said Wednesday’s data suggested that core inflation will undershoot the RBA’s projection of 1.75 per cent year-on-year in the June quarter, increasing pressure to cut the cash rate in the second half.

“For now at least, the disconnect between employment growth and wage increases is continuing,” Ms Hunter said.

The weak March quarter print followed a rise of 0.5 per cent in the December quarter.

The Australian dollar was already falling and immediately dropped another half cent against the US dollar to 70.40 US cents after the data’s release.

The most significant rise in the March quarter was the 7.7 per cent increase in vegetable prices as drought and adverse weather hit food production, while there was a 4.2 per cent rise for secondary education, and a 2.4 per cent rise for motor vehicles.

The rises were offset by an 8.7 per cent fall in automotive fuel, a 3.8 per cent fall in domestic travel and accommodation, and a 2.1 per cent fall in international travel and accommodation.