Preview: CPI -- June quarter
Australia's latest inflation report is due to be released by the ABS at 11:30am (AEST) today for the three months ending June. Matching the experiences of most other major advanced economies inflationary pressures in Australia have been soft over recent years. Not since the December quarter of 2015 has annual underlying inflation been within the 2-3% band targeted by the Reserve Bank of Australia (RBA). However, as Governor Philip Lowe outlined during a speech in Sydney last week that is a target the Bank remains committed to.
In order to achieve that objective, the Bank has recently concluded that tighter labour market conditions will be required to generate a faster pace of wages growth and, in turn, lift inflationary pressures. That was the Board's rationale for lowering the cash rate by a total of 50 basis points at its past two meetings to 1.0%. Though, as Governor Lowe highlighted last week, the Board is prepared to ease the cash rate further and another soft inflation report today would provide a strong signal for them to do so.
As it stands | CPI
Headline inflation, which is based on prices changes in a fixed basket of goods and services from one quarter to the next, stalled in Q1 (0.0%) missing expectations for a 0.2% rise. That saw the annual pace decelerate from 1.8% to 1.3% -- its lowest since Q3 2016 and well below the consensus call for 1.5%. The key influences in Q1 were weakness in petrol prices, retail goods, and housing costs.
Underlying (or core) inflation, which removes the impact of extreme price changes, also slowed sharply in Q1 with the average of the trimmed mean and weighted median measures declining from 0.42% to 0.19% quarter-on-quarter and from 1.73% to 1.42% year-on-year. Those outcomes were vastly below the 0.4%q/q and 1.65%Y/Y expectations implied by the average of the consensus forecasts. The RBA's preferred measure is the trimmed mean, of which the quarterly figure slowed from 0.47% to 0.28% (expected was 0.4%) and the annual pace eased from 1.82% to 1.6% (expected was 1.7%). Lastly, the weighted median measure fell from 0.36% to 0.1% in the quarter (exp 0.4%), which saw the pace over the year declining from 1.64% to 1.24% (exp 1.6%).
For a full review of Q1's inflation data see here
Market Expectations | CPI
Today's report is expected to show a slight lift in the headline pace inflation, due mostly to a notable rise in petrol prices over the June quarter. For core inflation, a stronger quarterly outcome is expected, though the annual pace is likely to ease further highlighting the lack of broad-based pricing pressures.
Based on estimates compiled by Bloomberg, headline inflation is forecast to rise by 0.5% in Q2 (around a range from 0.3% to 0.8%) and lift the annual pace from 1.3% to 1.5%. Core inflation is expected to average 0.4% in the quarter and ease from 1.42% to 1.35% over the year. Within those estimates, the trimmed mean is forecast to show a 0.4% quarter-on-quarter rise, slowing the annual pace from 1.6% to 1.5%, while the weighted median is also tipped to rise by 0.4% in Q2 but remain little changed through the year at 1.2%.
What to watch | CPI
The key number to watch out for in today's release is the trimmed mean. The detailed forecasts published by the RBA in May's Statement on Monetary Policy have trimmed mean inflation at 1.6% over the year to the June quarter, which is a touch above today's expectation for 1.5%.
The cash rate futures market is fully priced for another 25 basis point RBA rate cut by October (see chart, below), though if the trimmed mean were to come in notably below consensus, we would likely see expectations for a cut in September firm sharply and place further pressure on the $A. In that situation, we could also anticipate the RBA to revise lower its profile for inflation and thus delay the forecast return to the 2% lower band (currently set for June 2020) in August's quarterly statement that is due to be released on the 9/8.
