Australia's quarterly inflation report for the June quarter is due to be published by the ABS this morning (1130 AEST). This is the most comprehensive read on prices in the Australian economy, and for an RBA that is suspicious of the pace of disinflation implied in the monthly CPI gauge, the report is key to the near-term rates outlook. The RBA defied expectations to cut rates earlier this month, awaiting confirmation via the quarterly data that inflation is tracking in line with its forecasts. An August rate cut is essentially fully priced in already, so a hawkish repricing (higher AUD and bond yields) on upside surprises for the key inflation outcomes is where the volatility risk for markets sits going into the report.
June quarter preview: Inflation trajectory key to further RBA rate cuts
In today's report, headline CPI is expected to print at 0.8% in the quarter (forecast range: 0.7-0.9%), with the annual pace easing from 2.4% to 2.1% - in line with the RBA's May forecasts. Consensus for core or trimmed mean inflation is 0.7% (range: 0.5-0.8%) and 2.7% year-on-year, slowing from 2.9% currently but a little above the RBA's forecast for 2.6%. As a guide, annual headline CPI in the monthly indicator came in at 2.4% in April and 2.1% in May, while the trimmed mean measure was 2.8% in April and 2.4% in May.
The June quarter inflation outcomes will be a key input for the RBA as they revise their inflation forecasts going into the August meeting. The outlook for headline inflation is fairly volatile, with the RBA currently projecting it to rise again over the back half of the year to 3% as cost-of-living subsidies unwind. By contrast, core inflation is currently seen maintaining an easing pace to end the year at 2.6%, nearly on the midpoint of the target band. The RBA is looking for today's report to confirm core inflation specifically remains on this sort of trajectory.
Key items to watch out for in today's report are housing and durable goods prices. At the July meeting, RBA Governor Bullock highlighted upside risks to inflation from these sources based on the monthly data for April and May. Most focus will fall on the housing group (21% weighting in the CPI basket), which is seeing upward pressure from electricity rebates coming to an end and from home building costs that may be on the rise again.
March quarter recap: Core inflation returns to RBA target band
Quarterly headline inflation picked up to 0.9% in the March quarter, rising from 0.2% in the prior quarter alongside the fading impact of household electricity rebates. Nonetheless, the annual pace held at an unchanged 2.4%. Trimmed mean inflation firmed from 0.5% to 0.7% in the March quarter; however, the annual pace declined from 3.3% to 2.9%, its slowest pace since late 2021. With both headline and core inflation sitting within the RBA's 2-3% target band, the Monetary Policy Board cut the cash rate by 25bps to 3.85% at its May meeting.
Slowing services inflation was a key factor behind the easing in core inflation. Services inflation softened from 4.3% to 3.7% year-on-year in the March quarter, its slowest pace since the middle of 2022 and well down from its peak of 6.3% reached a year later. These are the signs the RBA has been looking for as it starts to lower rates, with easing services inflation suggesting that some of the more persistent price pressures in the economy have cooled. Meanwhile, goods inflation ticked up from 0.8% to 1.3% year-on-year, though it remains low even compared to 12 months earlier (3.1%) and is just a fraction of its pandemic highs (9.6%).
