UBS expects a big downside surprise in Australia's next inflation report

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  • UBS expects a downside surprise from Australia’s next inflation report, released on October 31.
  • It tips underlying inflation will grow by just 0.3% in the three months to September, near the lowest rate on record, leaving the change on a year earlier at 1.7%.
  • The RBA forecast that annual underlying inflation would sit at 1.75% by the end of this year. Its medium-term inflation target is 2-3% per annum.

Get ready for a downside surprise from Australia’s next consumer price inflation (CPI) report, says economists at UBS.

According to the bank, underlying CPI — of more importance to the Reserve Bank of Australia (RBA) when it comes to official interest rate settings — is likely to weaken sharply, moving back towards the lowest levels on record.

“Our [price] survey shows key Q3 underlying CPI up 0.3% quarter-on-quarter, one of the lowest on record,” says George Tharenou, Carlos Cacho and Jim Xu, members of the UBS Australian economics team.

“This sees the year-on-year rate tick down to 1.7%, the weakest since the March quarter of 2017, remaining at or below the RBA’s 2-3% target for 11 consecutive quarters.”


Policymakers at the RBA have a medium-term underlying inflation target of 2-3% per annum.

The UBS measure of underlying inflation uses the average of the trimmed mean, weighted median and CPI ex-volatile items measures released by the Australian Bureau of Statistics (ABS).

UBS says such a result “could surprise the market” given underlying price pressures have been slowly building since hitting their cyclical low-point in the middle of 2016.

However, while that could see some market participants rethink the view that the next move in official interest rates is likely to be higher, UBS doesn’t think any potential mindset shift will extend to policymakers at the RBA, which forecasts underlying inflation would end the year at 1.75% in its quarterly statement on monetary policy released in early August.

“We don’t expect it an immediate dovish shift [from the RBA], albeit another weak print for Q4 CPI would matter more,” UBS says.

“With weaker housing ahead, we still see the RBA on hold until 2020.”

The ABS will release Australia’s Q3 inflation report on Wednesday, October 31.

In the June quarter, the ABS said headline CPI rose by 0.4%, leaving the increase on a year earlier at 2.1%, the highest level in four years.

Underlying inflation — as measured by the average of the ABS’ trimmed mean and weighted median measures — rose by 0.5% in the three months to June, seeing the year-ended increase decelerate to 1.89% from 2.1% in the prior quarter.

On this occasion, UBS is forecasting that headline inflation will slow to 1.9% compared to a year earlier. It expects the average of the weighted median and trimmed mean readings will remain steady at 1.9%.


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