Australia's inflation report is out tomorrow -- here's what to look out for

John Lamparski/WireImage
  • Australia’s latest consumer price inflation (CPI) report will arrive tomorrow.
  • It’s arguably the most important data release in Australia when it comes to the outlook for interest rate settings from the Reserve Bank.
  • Economists see headline inflation increasing on the back of surging fuel prices. Underlying inflation, favoured by the RBA, is expected to decelerate slightly from a year earlier.

Australia’s June quarter consumer price inflation (CPI) report will arrive tomorrow.

While its lost a bit of clout in recent years, losing ground to financial stability concerns under the leadership of Philip Lowe as Governor of the Reserve Bank of Australia (RBA), it remains the most important data release in Australia when it comes to the outlook for official interest rate settings.

Time and again, the release of the CPI report has regularly led to a change in the cash rate one month later, underlining just how important it is.

Naturally, that ensures it gets a lot of interest.

Headline inflation — inclusive of all price movements in the ABS CPI basket — is tipped to lift 0.5% over the quarter, leaving the increase on a year earlier at 2.2%, up from 1.9% in the year to March.

While we won’t receive updated wage data until the middle of next month, it will likely be quicker than the increase in hourly pay rates for private-sector workers as measured by the ABS Wage Price Index.

Real pay rate for the vast majority of workers are likely to go backwards, in other words.

Stripping out volatile price movements during the quarter, core inflation — the average of the ABS trimmed-mean and weighted median readings — is also expected to increase by 0.5%, leaving the change on a year earlier at 1.9%.

The annual rate, if correct, would be a deceleration from the 1.98% pace seen in the year to March, leaving it below the RBA’s target band for an eleventh consecutive quarter.

When the RBA released its quarterly statement on monetary policy back in May, it forecast that underlying inflation would sit at 2% at the end of June. The bank doesn’t see underlying inflation returning to the midpoint of its target without a substantial pickup in wage pressures and improvement in productivity growth.

To gauge what’s driving underlying inflationary pressures, make sure to keep an eye on the ‘market goods and services ex volatile items’ index produced by the ABS.

Excluding volatile price movements, this tracks private sector inflationary pressures, removing the impact of price movements influenced by the government.

In the year to March, it grew by a paltry 1.1%, far slower than inflationary pressures in government-linked areas of the economy such as utilities, health, education, public transport and the price of booze and cigs.

This suggests that of the modest price pressures being felt at present, the vast majority are coming from government-linked increases rather than market forces.

While higher fuel costs will dominated the headlines tomorrow, it will be worth keeping an eye out for the true source of underlying price pressures within the economy.

The ABS will release the June quarter report at 11.30am AEST on Wednesday.

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