Australia's June quarter inflation report is due to be published by the ABS at 11:30am (AEST) today. Rising price pressures drove headline and underlying inflation above the top of the RBA's target band for the first time since 2008 in the March quarter, prompting the Board to hike interest rates by a total of 125bps since the previous CPI report. With further rate hikes in the pipeline, today's report will be a key input in the Board's assessment of the scale and pace of tightening required over the coming months.
As it stands | CPI
For the first time in 13 years, annual inflation on both a headline and trimmed mean basis is above the RBA's 2-3% target band. Headline inflation was 2.1% in the March quarter, lifting the annual rate to 5.1%. Broadening price pressures across the CPI basket pushed up the trimmed mean measure by 1.4% in the quarter to be 3.7% higher over the year.
Fuel and the construction of new dwellings remained major drivers of the CPI in the March quarter and rising food prices emerged as a new inflationary impulse. Constraints in global refining capacity and the war in Ukraine were pushing up prices for petrol and a broad range of commodities. Rising fertiliser prices, higher transportation costs and disruptions to supply due to the impacts from Covid and adverse weather were key factors contributing to rising food prices. Housing construction costs were up sharply again in Q1 as capacity constraints in the sector were leading to higher costs for materials and labour. Developers' base prices for new homes were rising due to fewer government HomeBuilder grants now being paid out after the scheme closed to new applicants in the first half of 2021.
Global factors are predominantly driving the pick-up in inflation in Australia. Inflation in the tradable components was 2.9% in the quarter and 6.8% over the year, its fastest pace on record. Domestic sources have become a more pronounced driver of inflation over the past year, though at 4.2%Y/Y the pace is more modest.
As has been seen in many other comparable economies, Australian inflation has been led by rising goods prices as strong demand has run up against constraints in global supply chains. Services inflation lifted more noticeably in the March quarter (1.1%), but goods components continued to contribute far more substantially to overall inflation.
Market expectations | CPI
The median estimate on the headline CPI is 1.9% for the quarter; however, the range of estimates is very wide from 1.6% on the low side to 2.8% on the high side. Annual inflation is forecast to rise from 5.1% to 6.2%, which would be its highest since Q4 1990.
Broadening price pressures are set to see a further pick-up in underlying inflation. Quarterly inflation is expected to come in at 1.5% on both the trimmed mean and weighted median measures. That would see annual inflation rising from 3.7% to 4.7% on the trimmed mean and from 3.2% to 4.3% for the weighted median.
What to watch | CPI
Most of the attention will centre around where headline inflation prints relative to the expected outcomes. Upside surprises would likely see markets pricing in a greater chance of a 75bps RBA rate hike in August, with a 50bps hike already fully discounted. Given the nature of inflation (with a few components making very large contributions), the underlying measures will be more impactful for the RBA. With today's report in hand, the RBA will revise its inflation forecasts ahead of next week's meeting. The current expectation is that trimmed mean inflation will peak in Q4 at 4.6%, though that estimate will be lifted. Depending on today's outcomes, the forecast peak could be lifted to around 5%, double the midpoint of the target band. Indications from Governor Lowe last week were that the RBA was looking to return rates to a 'neutral' setting (which it estimates roughly at 2.5% in nominal terms). In light of that and with the cash rate at 1.35%, the RBA looks set to keep hiking at pace for at least the next couple of meetings.
