Australia's long-awaited CPI inflation report for the June quarter is due at 11:30am (AEST) today. Coming ahead of next week's RBA meeting, today's report holds a lot of sway with markets in terms of setting expectations for either the continuation of an unchanged cash rate (4.35%) or a 25bps rate hike. The consensus forecasts are for headline inflation of 1% quarter-on-quarter and 3.8% year-on-year, with core CPI anticipated to print at 1%q/q and 4%Y/Y.
A recap: Disinflationary progress slowed in the March quarter
The pace of disinflation in Australia slowed in early 2024 as the key CPI outcomes for the March quarter came in above expectations. Quarterly inflation saw an uptick to 1% in both headline and trimmed mean (or core) terms from 0.6% and 0.8% respectively in Q4 2023. As a result, annual inflation to the March quarter saw smaller declines, with the headline CPI easing from 4.1% to 3.6% while the core rate softened from 4.2% to 4%.
Higher quarterly inflation was predominantly driven by the services basket. Cost increases in areas such as education costs (5.9%), rents (2.1%) and medical services (2.2%) underpinned a 1.4% rise in services inflation in the quarter. By contrast, goods inflation was a modest 0.5% in Q1. Components that pushed up goods prices included new dwellings, vegetables and pharmaceutical products. This was moderated by declines in furniture, electricity and fuel prices.
June quarter preview: Inflation pressures remain firm; services prices the key factor
The monthly CPI reports for April and May have indicated that inflationary pressures did not ease up in the June quarter. Based on these reports, the consensus call is that both headline and core CPI will again print at 1% in quarter-on-quarter terms. This would see annual inflation firming from 3.6% to 3.8% for headline CPI and the core rate holding at 4%. Those expectations compare to the RBA's forecasts of 3.8% year-on-year inflation for headline and core CPI in its May Statement on Monetary Policy.
Services prices - the key unknown going into today's report - have the potential to sway the key inflation outcomes one way or another. Only limited information can be gleaned from the April and May reports given that many services prices used to calculate the quarterly CPI are updated in the month of June. Key price updates will come through on items including utilities (water, electricity and gas), medical and health services, some household services (child care and vets), and financial services.
At its most recent meeting in June, the RBA Board noted that it needed to '... remain vigilant to upside risks to inflation' and that it was '... not ruling anything in or out' from a policy perspective. Going into today's report, markets assess the chance of an August rate hike to be relatively low at around 30%. An upside surprise in the key inflation outcomes would likely swing the odds in favour of a hike.
However, I think there is a higher threshold for the RBA to hike. Following today's report, the RBA will revise its inflation forecasts for the Board to consider at the August meeting. In my view, a hike would require the RBA to anticipate a more delayed return to the midpoint of the 2-3% inflation target band than the current view for 2026 or for the Board to judge that there are material risks to that outlook that require a policy response. It does not necessarily follow that upside surprises for Q2 CPI will affect the inflation forecasts over a policy-relevant timeframe. What needs to be considered is the effects of various government subsidies (namely energy bill rebates) that will reduce measured inflation over the coming year.
