Australia’s June quarter consumer price inflation report (CPI) is about to be released.
Arriving just four times a year, it’s arguably the most important data release on the Australian economic calendar, carrying the potential to shift interest rate expectations in an instant.
It has done so many times before, often leading to a change in the RBA cash rate in the month following it’s released.
Today, inflationary pressures are expected to remain subdued, continuing the theme seen in recent years.
However, while year-ended growth in headline CPI is expected to pickup on the back of higher energy prices, underlying inflation, of more importance for interest rate settings, is expected to moderate, leaving it below the RBA’s 2-3% target for yet another quarter.
Still, in the absence of an unusually-large downside miss, with unemployment trending lower and wage pressures appearing to have bottomed, another undershoot for underlying inflation is unlikely to herald a shift in policy stance from the RBA.
Here’s the state of play.
- The CPI report is based off price movements in a set basket of goods and services commonly purchased by metropolitan households.
- Individual items fall into 11 broader categories, and are weighted based on estimated expenditure by households.
- The RBA’s annual medium-term inflation target is 2 to 3%.
- In the March quarter, headline CPI rose 0.4%, leaving the change on a year earlier at 1.9%.
- Tradable prices — largely determined by offshore factors — fell 0.4% during the quarter, leaving the decline on a year earlier at 0.5%.
- In comparison, non-tradable prices — largely influenced by domestic factors — jumped 0.8% over the quarter, leaving the increase over the year at 3.1%.
- Non-tradable items account for around 60% of the ABS CPI basket. The remainder is made up of tradable items.
- Underlying CPI, also know as core inflation, rose 0.52% over the quarter after seasonal adjustments, leaving the increase on a year earlier at 1.98%, the fastest pace since late 2015.
- Despite the acceleration, it was the tenth consecutive report that underlying CPI came in below the RBA’s target.
- Underlying inflation — the average of the ABS trimmed-mean and weighted-median measures — strips out volatile price movements in the CPI survey, providing a cleaner read on underlying trends in price pressures.
- Today, economists expect headline and underlying inflationary pressures to diverge slightly.
- Headline CPI is expected to lift 0.5%, leaving the change on a year earlier at 2.2%. Higher petrol price will feature prominently.
- According to analysis from Westpac Bank, headline inflation has undershot the median economist forecast in each of the past six quarters. For those who like to use New Zealand’s CPI report as a guide, JP Morgan has found there’s very little correlation between it and headline inflation in Australia.
- In the year to March, average hourly pay rates excluding bonuses rose 2.07% for Australian workers. In the absence of an unexpected sharp increase in the June quarter, that means real wage growth for workers, especially in the private sector, likely went backwards over the year.
- Underlying CPI is expected to increase 0.5% during the quarter, leaving the change on a year earlier at 1.9%.
- In May, the RBA forecast that underlying inflation would sit at 2% in June. It doesn’t see underlying inflation returning to the midpoint of its target — 2.5% — without a sustained pickup in annual wage growth to 3.5% and improvement in productivity growth.
- To get an understanding of what’s driving underlying price pressures, keep an eye out for the “market goods and services ex volatile items” index produced by the ABS. This tracks private sector inflationary pressures, removing the impact of price movements influenced by government.
- In the year to March, it grew by a paltry 1.1%, indicating that price pressures were largely driven by higher costs in government-linked sectors of the economy.
- Ahead of the CPI release, markets aren’t fully priced for a 25 basis point increase in the RBA cash rate until early 2020.
The CPI report will be released at 11.30am AEST.
Business Insider will have all of the details, and any potential ramifications, as soon as it hits the screens.
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