Preview: CPI — September quarter

Australia's September quarter inflation data are due to be released by the ABS today at 11:30am (AEDT). As measured by the Consumer Price Index (CPI), Australia's inflationary pulse has been soft over recent years mirroring the trend experienced in other major economies as the forces of globalisation from increased competition and technological advancements have weighed on price pressures. Domestic influences have also been key highlighted by spare capacity in the labour market and below-trend output growth. 

The triple mandate of the Reserve Bank of Australia (RBA) includes an inflation target of 2-3% but the last time this objective was achieved was in the December quarter of 2015. The Board resumed its easing cycle earlier this year and since June has cut the cash rate by a total of 75 basis points to 0.75% to reduce spare capacity in the labour market by strengthening the pace of employment growth, lift wages growth and, in turn, generate inflation pressures. Notwithstanding, the progress back to target is expected to be gradual with the Bank's current forecats not indicating a return to the lower 2% band until mid-2021.    


As it stands | CPI 

The headline CPI measure (based on price changes in a fixed basket of goods and services) increased above expectations in the June quarter at 0.61% (forecast 0.5%), driven mostly by a strong increase in petrol prices, while there were also some signs of pass-through from a weaker Australian dollar with modest rises in the clothing and footwear and household goods groups. The annual pace lifted from 1.33% to 1.59% and outpaced the median forecast of 1.5%.

The average of the underlying CPI measures (adjusted for extreme price changes) came in at 0.4% in Q2, while the annual pace eased from 1.53% to 1.46%. Breaking this down, the trimmed mean measure — the RBA's preferred index — firmed from 0.3% to 0.42% to meet the consensus figure in Q2, while the annual pace was unchanged at 1.62%, also as expected. The weighted median measure lifted from 0.15% to 0.37% in the quarter, though the annual pace eased from 1.44% to 1.31% (after incorporating a later revision). 

The outcomes for headline inflation (1.59%Y/Y) and the trimmed mean (1.62%Y/Y) were in line with the forecasts in the RBA's August Statement on Monetary Policy.   

For our full review of Q2's CPI report see here


Market Expectations | CPI 

Today's release is expected to see inflation remain broadly unchanged. According to Bloomberg's survey of economists, the median forecast for headline CPI is 0.5% in Q3 (range: 0.3% to 0.9%), while the year-on-year pace is anticipated to lift to 1.7% (range: 1.4% to 1.8%). Core inflation is expected to remain around 0.4% in the quarter and 1.45% in annual terms. The median forecast for the trimmed mean is 0.4% in Q3, though the range is quite wide at 0.2% to 0.9%, with the annual pace to hold at 1.6% (range: 1.2% to 1.7%). Finally, the weighted median is forecast to remain unchanged at 0.4% quarter-on-quarter and 1.3% year-on-year.  

   

What to watch | CPI

With inflation meeting the RBA's expectations in the June quarter and expected to remain broadly unchanged in Q3, financial markets assess the risk of a rate cut at next week's Board meeting as low with pricing indicating around a 20% chance. This also reflects a decline in the national unemployment rate to 5.2% in September in the most recent data (see here). As such, a further cut in the cash rate by 25 basis points to 0.5% is now not fully discounted until around mid next year. 

The underlying detail, therefore, appears to be of most interest today. On this front, Q2's report contained indications that the pass-through to prices from a weaker Australian dollar (around -5% in USD terms over the year to Q2) was starting to gain some traction. This can be seen in tradables inflation (excluding volatile items) rising by 0.5% in Q2 and 1.0% over the year — its fastest annual pace in 5 years — shown in the chart, below. This theme likely has further to run given Australian dollar weakness persisted over Q3 (-3.8% in USD terms) as the RBA cut rates in July and indicated a willingness to ease further, which it subsequently acted on in October. In addition, the impact of drought conditions is likely to have resulted in further price increases for meat and bread in Q3.