Your definitive guide to this week's Australian inflation report

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Australia’s September quarter consumer price inflation (CPI) report will released on Wednesday at 11.30am.

It’s arguably the most important data release in Australia, carrying the ability to shift the outlook for interest rates in an instant.

This report will be no exception.

On an otherwise quiet domestic data calendar, it will be the undisputed focal point for Australian financial markets.

With the report just days away, economists have been busying fine-tuning their forecasts, with another modest lift expected.

The median forecast is looking for an increase in headline CPI of 0.8%, seeing the year-on-year rate tick up from 1.9% to 2%.

Underlying CPI — the average of the ABS’s trimmed mean and weighted median measures and of far more importance when it comes to monetary policy deliberations at the Reserve Bank of Australia (RBA) — is also expected to edge higher, increasing 0.5% for the quarter leaving the change on a year earlier at 2%.

That would be significant, seeing the annual rate return to the bottom of the RBA’s 2-3% inflation target for the first time in several years.

However, while that’s the median market view, individual forecasts vary widely, suggesting that there’s a fair degree of uncertainty ahead of the release.

And, for anyone’s who’s followed this release closely over the years would know, it has the ability to surprise. One only has to look back to the March quarter CPI report last year for evidence.

Now, like then, markets were expecting the next move in interest rates from the RBA to be higher. However, such was the weakness in the March quarter report it saw the RBA cut rates not once but twice over the next three months.

That’s how influential this report can be.

Given the potential for surprise, it’s an opportune time to see what individual forecasters are expecting.

Will this report pave the way for a potential rate hike from the RBA next year, or will it shock to the downside, seeing talk of rate hikes vanish in an instant?

Let’s find out what Australia’s economic community is looking for.

Gareth Aird, Commonwealth Bank (Headline CPI +0.9% QQ, +2.1% YY. Core CPI +0.5%, +2.1% YY)

For Q3 2017, we expect the annual rate of both headline and core inflation to step up to within the RBA’s target band. The solid lift in headline inflation over the quarter will be driven by a lift in energy prices. Core inflation, meanwhile, is forecast to continue to lift by 0.5% which is broadly in line with wages growth.

If Q3 CPI prints in line with our expectations then both headline and core inflation will move within the RBA’s target band. That alone, however, does not mean a rate hike is around the corner. Underlying wages growth (i.e. excluding the impact of the Fair Work Commission on the minimum wage) is expected to remain soft for some time. And there is still a fragility to households, as evidenced by the latest retail trade data. As such, we continue to expect the RBA to be on hold until late 2018.

A high-side CPI surprise would mean a risk that our late 2018 rate call would have to be brought forward. A downside surprise could see any move slip into 2019.

Justin Smirk, Westpac (Headline CPI +0.7% QQ, +1.9% YY. Core CPI +0.3%, +1.8% YY)

Key factors in Q3 are ongoing grocery competition holding back food prices, annual repricing of the tobacco excise, surging electricity prices and further gains in dwelling purchase costs, almost flat rents and, falling health, transport and communication prices.

Core inflation is forecast to print 0.3% quarter-on-quarter (QQ) holding the annual rate flat at 1.8% year-on-year (YY). The trimmed mean is forecast to rise 0.27% while the weighted median forecast is 0.32%. The two quarter annualised pace of core inflation is forecast to decelerate to 1.7% YY from 2.1% YY, well below the bottom of the RBA’s target band.

This is a soft update as outside of electricity, gas and dwelling purchases — it is hard to find any signs of broader inflationary pressure with many consumer goods captive to a competitive deflationary cycle. Ex-housing, which includes energy bills, the CPI is forecast to rise 0.1%.

Jo Masters, ANZ (Headline CPI +0.8% QQ, +2.0% YY. Core CPI +0.4%, +1.9% YY)

Q3 headline CPI will be boosted by the sharp increases in electricity and gas prices as well as annual rises for property rates and charges and the tobacco excise. A seasonal increase in international airfares will also add to CPI. Our daily tracking of petrol prices suggests a 2.5% QQ decline in prices in Q3, which will subtract 0.1 percentage point from CPI.

The average of the underlying inflation measures is forecast to have risen by 0.4% QQ in Q3, weaker than the previous quarter, but still sufficient to lift annual growth a touch. There appears to be some residual seasonality in the trimmed mean measure, with a step-down in the Q3 readings in each of the past three years. As such, a result in line with our expectation probably overstates the weakness in core inflation.

Indeed, we continue to believe that core inflation has stabilised, and look for a very gradual lift over the year ahead.

Sally Auld, JP Morgan (Headline CPI +0.7% QQ, +1.9% YY. Core CPI +0.5%, +2.0% YY)

We expect headline inflation of 0.7% QQ, with a spike in utilities inflation, driven predominantly by electricity as well as gas hikes during the quarter. Fuel is a small drag, while vegetable prices also declined fairly significantly toward the end of the September quarter. We expect trimmed mean CPI to print at 0.5% QQ, with limited pass-through of utilities prices into core goods and services prices. Assuming no revisions to prior releases, this would bring the annual rate of core inflation to 2% YY.

Tapas Strickland, National Australia Bank (Headline CPI +0.8% QQ, +2.0% YY. Core CPI +0.45%, +1.95% YY)

NAB expects headline CPI to rise 0.8% QQ and 2.0% YY. Higher electricity and energy prices will contribute the lion’s share. Acting as some offset is a fall in petrol prices and a decline in vegetable prices: a mild winter and early spring has led to bumper crops for tomatoes, broccoli, beans and zucchinis. There may be some downside risk to our forecast if retail vegetable prices fall as far as wholesale prices, wholesale vegetable prices fell 16% which we moderated to a 4% decline in the CPI.

Core inflation is likely to remain stable, with the trimmed mean (0.5% QQ and 2.0% YY) and the weighted median (0.4% QQ and 1.9% YY) both mirroring recent growth. Taking the average, underlying inflation is thus expected to be sitting at the bottom of the RBA’s 2-3% target band for the first time since December 2015.

Q3 CPI along the lines we are expecting is broadly on track with the RBA’s August Statement of Monetary Policy forecasts. As for the outlook, inflation is only expected to rise gradually and this quarter’s CPI will likely support that expectation. There is the risk that higher electricity prices could have second round effects and it will be important to monitor whether firms have the pricing power to pass such cost rises on to their buyers — the NAB Business Survey Prices series suggests not yet at least.

For the RBA, it will be important to see whether inflation has truly bottomed as the steady core figures over the past three quarters would suggest. If so, inflation should gradually lift as the labour market tightens. NAB expects the unemployment rate will be low enough by mid-2018 to give the RBA confidence in wages and inflation picking up. This would place the RBA in a position to remove some of the stimulus in place and NAB’s forecasts sees the RBA hiking rates twice in the second half of 2018.

Phil Odonaghoe, Deutsche Bank (Headline CPI +0.8% QQ, +2.0% YY. Core CPI +0.5%, +2.0% YY)

We expect core inflation will remain subdued this quarter. Our pick is for the average of the RBA core measures to rise by 0.5% QQ leaving underlying inflation on all three measures at 2%, the bottom of the RBA’s target band.

A CPI [outcome] in line with our forecasts will do little to change the RBA’s policy stance, in our view. The forecasts outlined in the August Statement of Monetary Policy had both headline and underlying inflation between 1.5% and 2.5% by the end of 2017. With our forecast suggesting that both inflation measures will be at around 2% in the September quarter, it is difficult to conclude these figures are inconsistent with the Bank’s near-term view.

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