Australian inflation is expected to have risen further in the December quarter to new highs since the early 1990s (data due 11:30am AEDT). This will mark the peak in inflation, likely lower than forecast by the RBA. A softening global inflationary backdrop and signs of slowing price pressures in Australia may prompt the RBA to revise its timeline for an earlier return of inflation to the 2-3% target range.
As it stands | CPI
Inflation pressures broadened in the September quarter rising by 1.8% on both a headline and trimmed mean (excluding volatile items) basis. Annual inflation was running at its highest in three decades, with headline CPI elevating from 6.1% to 7.3% and from 4.9% to 6.1% for the trimmed mean.
New home building costs (3.7%q/q) moderated but continued to contribute strongly to inflation; these costs are up by almost 21% over the year as strong demand from a record number of homes under construction has run up against shortages of materials and labour. Grocery prices lifted sharply in the quarter (3.2%) reflecting supply impacts from recent floods and higher input costs for producers.
A new source of inflation pressure came through in household utilities (4.8%q/q) as gas and electricity prices lifted in response to rising wholesale prices, though government rebates held back much larger price rises from flowing through. Pandemic-related factors were continuing to push up a range of durable goods prices, including furniture (6.3%q/q) and new vehicles (0.5%q/q), as well as for reopened services in holiday travel (4%q/q) and dining out (2.9%q/q).
Market expectations | CPI
Market consensus is for an easing in quarterly headline CPI to 1.6%, with estimates ranging between 1.5% to 2.2%, and for the annual pace to firm to 7.5%. Analysis of the ABS's monthly CPI indicator suggests the consensus estimate should be around the mark for today's quarterly outcome. The 3-month change in the monthly CPI for the period ending in November was 1.6%, and as the back history indicates, this has proven to be an accurate guide to the eventual quarterly change in the CPI. The median estimate for trimmed mean inflation is 1.5%q/q and 6.5%Y/Y.
What to watch | CPI
The December quarter should be the peak for inflation. The global inflation pulse is weakening and indicators including yesterday's NAB Business Survey suggest price pressures are receding in Australia. If the consensus proves to be broadly correct, headline CPI will hit a lower peak than the 8% forecast by the RBA. Those forecasts will be updated for the upcoming meeting on February 7. The key question is whether the RBA will see enough signs in today's report, as well as from forward-looking indicators and global developments to forecast a faster pace of decline in inflation back to the 2-3% target band. Markets see there is a case for this scenario but are fairly divided over prospects for the February meeting. A below consensus CPI outcome could be more impactful for markets than an upside surprise, likely resulting in a February pause from the RBA shifting into favour.