Australia’s September quarter consumer price inflation (CPI) report will be released tomorrow, and it’ll undoubtedly create a few talking points.
Headline inflation is tipped to rise 0.8%, leaving the increase on a year earlier at 2.0%.
Underlying inflation, of more importance when it comes to the outlook for interest rates, is expected to grow by a smaller 0.5%, seeing the year-on-year rate tick up to 2.0%.
Should the latter occur, it will be significant, leaving inflation at the lower end of the Reserve Bank of Australia’s (RBA) annual target of 2 to 3% for the first time since late 2015.
However, while that’s what the market is looking for, individual forecasters have vastly differing views.
Some, such as Westpac, think that underlying inflation will come in well below market expectations, snuffing out any possibility of a RBA rate hike next year.
However, others such as TD Securities think that all of the risks tomorrow will be to the upside, potentially bringing forward the timing for a RBA rate hike, currently fully priced by markets for October 2018.
“Inflation continues to climb from the lows reached in mid-2016, and we expect an upbeat September quarter CPI report tomorrow,” says Annette Beacher, Chief Asia-Pacific Macro Strategist at TD.
“We look for Q3 trimmed mean to increase by 0.6% for the quarter, or 2.04% over the year, and combined with a 0.5% lift in the weighted median measure we see overall annual underlying inflation creeping up from 1.84% to 2.04%.”
Beacher says that there’s “upside risk” to her call, acknowledging that separate inflation measures — such as the Melbourne Institute’s (MI) monthly inflation gauge — point to an even larger pickup in price pressures.
“In unrounded terms, TD is skewed to the upside, guided by upbeat monthly inflation prints,” she says, noting that the monthly trimmed mean reading from the MI has averaged 2.4% annualised over the September quarter.
“As we say each quarter, there isn’t a perfect relationship between [the MI) and more comprehensive quarterly inflation reports. However, another pickup in underlying inflation appears inevitable and monthly domestic inflation is accelerating.”
If a hotter-than-expected underlying inflation figure is released, Beacher says it could bring forward the likely timing of an RBA rate increase, especially with Australian employment growth running hot at present.
“An upside surprise towards 2.2%, combined with much stronger employment over this year, can potentially… bring forward the first hike [from the RBA].”
Should an in-line result occur, Beacher says that it would be consistent with the RBA current inflation forecasts. However, she says that the RBA would want further confirmation that underlying inflation is moving back towards its target mid-point before considering lifting interest rates.
“We suspect that the RBA wants to see inflation actually printing closer to mid-target before switching to a more hawkish tone, [likely] February 2018 at the earliest.”
TD is currently forecasting that the RBA will lift interest rate for the first time since late 2010 in May next year.