HSBC: Inflation is coming back to Australia, and rates are on hold

Coal prices have soared recently, iron ore is much stronger than many forecast and oil is rising on the back of a planned OPEC agreement on production.

That’s helped global commodity prices rise 26% since January, which means they’re now past the trough. That, in turn, is likely to drive CPI inflation in Australia higher, according to Paul Bloxham, HSBC Australia’s chief economist.

Bloxham, and his colleague economist Daniel Smith, say in a note to clients this has “significant implications for Australia” in terms of inflation.

Initially, the recent rise in oil should be felt directly through the rise in petrol prices and flow through to the CPI with “round effects through the impact on transport and other energy costs”.

But the pair note there is “another, less common channel” that will lift CPI given the large role of the resources sector.

“The broader lift in commodity prices should increase Australia’s national income growth, supporting corporate profits, tax revenues and wages and, in turn, underpinning domestic inflation,” they note.

Bloxham and Smith say that the transmission mechanism is via the “strong positive correlation between Australia’s terms of trade (the ratio of export prices to import prices) and unit labour costs (think wages)”.

On that basis HSBC believes inflation is about to rise again in Australia.

Bloxham and Smith say “if oil prices hold at the current levels, y-o-y CPI inflation could be back in the RBA’s 2-3% target band by Q1 2017”.

So even though Bloxham says that means the RBA is now on hold, the return of inflation and a lift in wages is great news for the Australian economy.

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