Of all Australian economic data releases, few, if any, are as important as the nation’s consumer price inflation (CPI) report.
Released once a quarter, it has the power to change the outlook for Australian interest rates in an instant.
One only has to look at the March quarter report from 2016 for evidence.
Headline inflation fell by 0.2%, leaving the annual increase at just 1.3%. Core inflation, also known as underlying inflation, increased by just 0.15%, seeing the annual rate slow to 1.55%, the weakest increase on record.
The incredibly soft prints saw the Reserve Bank of Australia (RBA) cut official interest rates twice in the following three month, seeing the Australian dollar weaken significantly while the ASX 200 and east coast property prices soared.
The CPI report is that influential, even if it has lost a bit of clout under new RBA governor Philip Lowe who appears to have placed greater importance on financial stability risks than his predecessor Glenn Stevens.
The June quarter report for 2017 will be released on Wednesday, and with the debate surrounding the outlook for domestic interest rates heating up, it will once again be influential.
Headline CPI is expected to increase by 0.4%, seeing the year-on-year (YY) rate rise to 2.2%, the fastest pace since the September quarter of 2014 if correct.
Core CPI — combining the trimmed mean and weighted median readings from the ABS and far more influential on the outlook for monetary policy settings — is forecast to lift by 0.5%, leaving the increase on a year earlier at 1.75%.
That outcome, should it arrive, will match the RBA’s forecasts in its May Statement on Monetary Policy (SOMP), helping to cement the view that interest rates will remain on hold for the foreseeable future.
Such a result, after all, would still sit below the RBA’s 2-3% inflation target.
However, as those who follow this report closely know, it can often delve up surprises in both directions. And this report is no exception.
Ahead of its release, it’s an opportune time to look at what Australia’s economic community think will happen.
The preview reports have been rolling in thick and fast in recent days, and, as usual, there’s plenty of differing opinions.
Here’s what they’re expecting, starting with Jo Masters, senior economist at ANZ.
Jo Masters, ANZ
Underlying inflation pressures remain modest. We forecast the average of the core measures to have risen by 0.5% in Q2, the same rate as the average of the previous two quarters, which will keep annual core inflation steady at 1.75% YY.
A weak global inflation pulse, intense retail competition and anaemic wage growth remain key factors for the inflation outlook. Wage growth looks to have stabilised, but we expect only a very gradual rise from here given the amount of spare capacity in the labour market. We see core inflation below the RBA’s 2-3% target until late 2018.
For the RBA, an outcome in line with our expectations for core inflation would be consistent with the most recent SoMP. From a policy perspective, the modest inflation profile is being countered by concerns around the housing market and financial imbalances. Against this backdrop, we continue to see the RBA on hold for the foreseeable future.
Michael Workman, Commonwealth Bank
The underlying rate is forecast to also rise by 0.5% and unchanged in annual terms at 1.7%. On the underlying measure, inflation is still well below the low end of the RBA’s 2% to 3% target band. In our view, continued low underlying inflation does not support an increase in the RBA’s cash rate over the rest of 2017. Higher utility prices in coming quarters will boost the headline numbers but the underlying rates should stay below 2% per annum.
On balance, the risks to our call are to the downside given low wages growth. But the firmer retail data and record new car sales indicate that consumer demand may have improved over Q2.
In our view, the most likely scenario is that the RBA will wait until after the 2018 Q3 CPI before lifting the cash rate. There are some headwinds coming over the horizon for many households. Mortgage rates for investors have been rising for the last few months and the large rises coming in electricity and gas prices will crimp consumer confidence and discretionary spending.
Justin Smirk, Westpac
Westpac is forecasting the average of the core measures to rise by 0.54% in Q2 with the annual pace lifting to 1.8% YY from 1.7% YY. Traded goods and services (influenced by global forces) are forecast to rise 0.9% with the annual pace lifting to 1.6% YY from 0.7% YY. Non-traded prices (influenced by domestic factors) are forecast to rise 0.5% for an annual pace of 2.8% YY from 3.4% YY. The six month annualised pace of the average of the core measures is forecast to be 1.9% YY compared to 1.8% YY in Q1.
Prashant Newnaha, TD Securities
We look for the Q2 trimmed mean to increase by 0.6%, picking up from 1.86% YY to 1.93% YY, and combined with a 0.55% lift in the weighted median measure we see overall annual underlying inflation rising by 0.6%, and the annual rate barely creeping higher from 1.76% YY to 1.82% YY.
Our forecasts are consistent with the RBA’s May projections — core rising to 2% by year end — and so supports its on-hold stance.
Consensus anticipates slightly softer CPI prints than TD.
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