Wednesday’s low inflation figures would normally suggest the Reserve Bank could cut interest rates. But the breakdown of the figures shows that housing prices continue to remain solid and the reasons for the low inflation have mostly washed through the system. Thus, while the low inflation figures do give the RBA room to move on interest rates, there is little in the figures to suggest they actually will.

We live in a funny world at the moment. Yesterday’s latest consumer price index figures showed that in the March quarter inflation rose just 0.2% and in the past 12 months it grew just 1.3%. That level of annual growth is less than half the 20-year average of 2.7%, and yet in response the price of the Australian dollar jumped about 0.8% as the market took the numbers to suggest the chances of another rate cut were reduced.

The annual growth of 1.3% is the third lowest inflation growth figure in the past 15 years. And the past six months has seen average prices grow by such a meagre amount that were they to be replicated over the next six months, inflation would have grown by just 0.8% in the year.

So why was this low figure ignored by the market? Mostly it is because it was driven by one-off factors such as the removal of the carbon price, and by prices which fell but have since started to rise. Chief among this last aspect is that of petrol prices.

Transport costs – which include automotive fuel, motor vehicles and public transport fares – contributed most to the weak inflation growth. It detracted around 0.4 percentage points from the quarterly inflation figure. Automotive fuel (which accounts for nearly a third of all costs in the transport group) fell 13% in the March quarter alone, and 22.4% over the past year – making it easily the biggest fall of any item in those periods:

But the ABS noted that while its measure of automotive fuel fell in the March quarter, in reality petrol prices across the country are now about 15% higher than they were on 1 January this year.

The problem for the ABS is that each quarter it records the average of prices for the past three months. Thus, while on 1 January the average price of petrol was around $1.20 a litre, for the first six weeks it fell below that price. From the middle of February to the end of March, however, it rose above the $1.20 a litre mark – to around $1.38.

Thus the average fuel price for the March quarter was around $1.20 – 13% below the average December quarter price of around $1.38 – but that price is no longer available.

And given fuel prices were such a major contributor to the low CPI figure, it means the level of inflation recorded in the March quarter is very much in the rear view mirror.

This is reflected in the “core inflation” measure used by the RBA of “trimmed mean” and “weighted median”, sitting on 2.3% and 2.4% respectively. These measures, which attempt to filter out one-off events, are pretty much bang in the middle on the RBA’s 2.5% to 3% target inflation range:

The low fuel prices also led to the fall in the price of tradable goods. These goods are those that have their price mostly determined overseas (or on the world market). In the past year they fell 0.9%, while the prices of non-tradables rose 2.6%:

When the Reserve Bank worries about inflation, it realises there is not a lot it can do to affect the world price – raising or cutting interest rates will have no impact at all on the price we pay for oil. And in the past it has reacted to increased inflation mostly when the non-tradable prices (goods and services like houses, electricity, education, health) have sharply increased – such as during 2007-08 and in 2010.

But 2.6% is no cause for concern, although the past six months has seen a slight uptick, which would have the RBA at least raising an eyebrow.

And, as is often the case, that eyebrow would be directed towards house prices. The CPI figure only counts the price of new dwellings bought for owner occupier purposes, and thus doesn’t count all the houses bought by investors. But nevertheless it gives a nice indication of how housing prices are going.

And as usual they are going a lot more in Sydney than anywhere else.

In Sydney, new dwelling prices increased by 7.2% in the past year. The next biggest increase was in Melbourne, where prices rose by 4.9%.

On Wednesday, the governor of the RBA, Glenn Stevens, suggested in a speech to the American Australian Association that in his opinion “popular commentary” was “too focused on Sydney prices and pays too little attention to the more disparate trends among the other 80% of Australia”.

And certainly Sydney does get most of the attention. But it says something about the size and influence of the Sydney housing market that the average rise of new dwelling prices across the nation was 4.8% – meaning that Sydney effectively cancelled out the much smaller increases in Adelaide, Brisbane, Perth, Hobart, Canberra and Darwin.

Moreover, these figures do nothing to disavow Stevens’s view that “it is hard to escape the conclusion that Sydney prices … look rather exuberant”.

The difficulty for the RBA is that when worrying about inflation it needs to worry about the impact of interest rates across the economy – you can’t just set interest rates for one state. And while lower interest rates do eventually have an impact on prices through increased demand, the most immediate and direct impact is on the price of housing.

And when you look at new dwelling prices across Sydney, Melbourne and Adelaide compared with overall inflation in the past four years, the difficulty for the RBA is apparent:

Since March 2011, Sydney’s new dwelling prices have risen 17.9%, compared with a rise in overall inflation of just 8.7%. But prices in Melbourne and Adelaide over that period actually rose less than inflation.

And while Brisbane and Perth saw new dwelling prices in the past four years rise faster than inflation, only in Sydney and Melbourne are those prices now rising faster than the 15-year average.

And thus the battle on interest rates will continue to be one of trying to induce growth into the economy, while hoping that doing so does not induce housing prices to become any more “exuberant” than they already are. In the past, 1.3% inflation would be a signal for the RBA to cut rates. This quarter’s figures, if anything, would have them hitting the pause button.