Why the risks to Australia's next inflation report may already be to the downside, in one chart

Oliver Furrer / Getty Images
  • Australia’s June quarter CPI report will be released next Wednesday.
  • In the past six reports, forecasters have overstated the increase in CPI seen during the quarter.
  • Forecasters have a better track record for predicting core CPI, the measure favoured by the RBA.

Of all Australian data releases few, if any, are as important as consumer price inflation (CPI) when it comes to the outlook for official interest rate settings from the Reserve Bank of Australia (RBA).

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.

The June quarter CPI report will be released next Wednesday.

Don’t be surprised if the headline figure comes in below market expectations.

Here’s why.

Westpac Bank

From Westpac Bank, it shows that in each of the past six CPI releases, economists have overestimated the scale of the quarterly increase.

“The average error since the December quarter 2016 is +0.15 percentage points,” says Justin Smirk, Senior Economist at Westpac. “As a group, market forecasters have been overestimating the inflationary impulse in the Australian economy.”

Final forecasts for the June CPI report will be released today by Bloomberg.

Based on recent form, the risks appear to be to the downside for the headline print, even before they’ve arrived.

However, while the headline CPI figure is important given its often used for wage negotiations and helps drive sentiment towards the outlook for inflationary pressures, the main area of interest will be on the ABS “core” CPI reading, the average of the trimmed mean and weighted median figures.

These strip out volatile price movement seen during the quarter, and are therefore favoured by the RBA.

In comparison to headline CPI, Smirk says economists forecasts for core inflation are often close to the mark.

“The average error on core inflation over the same period of time is just 0.025 percentage points, so the error appears to be around missing some of the more extreme discounting in certain expenditure classes rather than a general over estimation of the underlying price momentum,” he says.

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