Australia's inflation report for the September quarter is due for release at 11:30am (AEDT) today. Government policy decisions and shifts in spending patterns associated with the pandemic are having a significant impact on inflation and the lockdowns seen through Q3 add further complexity to the mix. In today's release, annual headline inflation is expected to moderate from a 13-year high as base effects fade while the underlying measures are forecast to remain below the bottom of the RBA's target band. With markets shifting aggressively ahead of the RBA's 2024 guidance on rate hikes, to as early as Q3 next year, will there be enough in today's report for that outlook to hold up?
As it stands | CPI
Headline inflation came in at 0.8% in the June quarter, stronger than both the consensus estimate (0.7%) and Q1's outcome (0.6%). The annual rate accelerated to its highest since Q3 2008 at 3.8% from 1.1%, driven largely by the reversal of pandemic-related price falls.
The underlying measures lifted modestly in Q2 to 0.5% from 0.4% on both the trimmed mean and weighted median measures. Base effects took the trimmed mean up to 1.6%Y/Y from 1.1%Y/Y and to 1.7%Y/Y from 1.3%Y/Y on the weighted median.
Inflation readings are being impacted by a range of crosscurrents, mostly related to the pandemic. Fuel prices returning to pre-pandemic levels and the unwinding of some government measures (including free childcare and electricity rebates) to support households have made the largest contributions to the rise in annual headline inflation. A notable contribution in the June quarter came from an unseasonal rise in fruit and vegetable prices after supply was impacted by floods and cyclones on the east coast.
On the other hand, a number of government subsidies, such as the HomeBuilder policy, discounted airfares and voucher schemes were weighing on inflation. Within the housing group (around 24% of the CPI), new dwelling costs (8.5% of the CPI) contracted by 0.1% in the quarter, held down by the HomeBuilder grants and state government initiatives. Without these subsidies, the ABS reports the quarterly rise would have been 1.9%. The federal government's half price airfares package to support domestic tourism led to a 1.3% fall in domestic holiday travel & accommodation, weighing on the recreation & culture group in Q2 (-0.1%). Meanwhile, meals & takeaway foods fell in Q2 (-0.7%), reflecting voucher schemes in New South Wales and in Melbourne that lowered out-of-pocket costs of dining out.
Market expectations | CPI
The consensus forecast is for headline inflation to have risen by 0.8% in Q3, with the range of estimates sitting between 0.5% to 1.1%. Annual inflation is expected to come back to 3.1% from 3.8%, with the 1.6%q/q rise from Q3 2020 falling out of the calculation. For the underlying measures, the consensus for both the trimmed mean and weighted median is 0.5% on the quarter. The annual pace for the trimmed mean is expected to firm to 1.8% from 1.6% and to 1.8% from 1.7% for the weighted median.
What to watch | CPI
The complexities in assessing the inflation dynamics are elevated given the Q3 lockdowns across large parts of the nation, leading to the unavailability of many items in the CPI basket. As far as policy goes the underlying measures are key. The recent RBA October meeting minutes signalled upside risks to its subdued underlying inflation outlook, which the Bank does not see hitting the middle of the 2-3% target band over the forecast period out to 2023. A close watch should also be on the housing group as it presents an upside risk to overall inflation as the dampening effect of the HomeBuilder grants on dwelling prices recedes and as conditions in rental markets improve.
