Australia saw deflation for the first time in seven years in the first quarter, as falling petrol, food and clothing prices drove down the cost of a basket of goods and services. 
The Australian Bureau of Statistics said on Wednesday the consumer price index (CPI) contracted 0.2 per cent in the three months to the end of   March, taking the annual rate to 1.3 per cent, compared with 1.7 per cent at the end of   December.
More importantly, the core annual rate, after lopping off or re-weighting volatile items such as fuel, came in at 1.55 per cent, well below the bottom of the Reserve Bank of Australia's target band of 2 per cent to 3 per cent.
Subdued inflation, a global trend, gives the central bank scope for another cut to the cash rate.
However, persistent deflation would force it to cut the cash rate from an already-low 2 per cent to boost spending and investment while driving the Australian dollar even lower.
Falling prices discourage spending and investment as both consumers and businesses hold off.
"Whereas the RBA was previously thinking that low inflation would allow it to cut interest rates if demand faltered, it is now clear that low inflation itself is the problem," said Capital Economics' chief economist for Australia Paul Dales. 
The ABS said the price falls were broad-based, led by fuel and fruit but including transport, travel and accommodation and recreation and culture.
Wednesday's CPI figures were well below expectations, and the Australian dollar plunged more than 1 per cent, to around US76.60&cent;.
Jamieson Coote Bonds executive director said the RBA had been "caught asleep at the wheel".
"[This is] a shocking set of inflation numbers in a period when the falling currency should have boosted tradeables, plus there were downward revisions for the previous period," he said. 
More to come..