Today's June quarter inflation report (due 11:30am AEST) will go a long way to determining how much further the RBA's tightening cycle has to run. Inflation in Australia peaked at the end of 2022 but remains elevated, with domestically generated price pressures yet to abate.
Inflation started to soften from cycle peaks in the March quarter...
Inflation softened in the March quarter, confirming the peak came in late 2022 at 30-year highs. Headline CPI was 1.4% in the quarter - slowing from 1.9% in the previous quarter - resulting in the annual pace sliding from 7.8% to 7%. Trimmed mean CPI - a key gauge of core inflation - was 1.2% quarter-on-quarter (from 1.7%) to be 6.6% over the year, down from the 6.9% peak in the December quarter.
The decline in Australian inflation in early 2023 reflected disinflationary forces from offshore. Tradables inflation - goods and services whose prices are influenced by global factors - slowed materially to 0.3%q/q (from 1.5%) on the back of price falls for international travel (-8.2%), clothing and footwear (-2.6%) and fuel (-0.8%), with the annual pace in at 6.1% from 8.7%. Non-tradables inflation - reflecting domestically generated price pressures - remained elevated at 1.9% in the quarter (from 2.1%) and 7.5% over the year; key contributors in the March quarter were domestic travel (4.7%), medical services (4.2%), and tertiary education (9.7%).
... and markets expect inflation to decline further in Q2
Headline inflation in the June quarter is forecast at 1% (range: 0.6% to 1.4%), with the annual pace expected to slow to 6.2% from 7%. The ABS's monthly CPI indicator suggests these expectations should be around the mark. As a proxy for the quarterly figure, the 3-month change in the headline CPI to May was 0.9%. For annual inflation, outcomes of 6.3% in March, 6.8% in April and 5.6% in May average out at 6.2% over the period. Forecasts for trimmed mean inflation sit at 1.1% in the quarter and 6% over the year.
Look out for services inflation, which is key for the RBA
There are a few key factors to highlight going into the report. Given the drivers of inflation in Australia are rotating from global to domestic factors, the RBA has emphasised that trends in services prices will be a major influence on the timeframe in returning inflation to the 2-3% target band. Rising services prices partly reflects labour cost pressures stemming from a strong labour market and are seen by the RBA as posing a risk of sustaining above-target inflation. In this respect, rents are another component under close watch. Rent inflation is rising with a lag and will be adding to measured inflation through the back half of the year.
Also in today's report, keep an eye on electricity prices. The monthly CPI gauge has been reporting a slowing in household electricity inflation, consistent with state government rebates coming into effect; however, electricity prices are set to rise in the September quarter after the regulator approved large increases to the Default Market Offer (that effectively works as a price cap on electricity bills in certain states) for 2023/24.
