Soft Australian inflationary pressures suggest the RBA will adopt an explicit easing bias for June

Getty/Brendon Thorne

Australian inflationary pressures remained subdued in May according to the latest TD-MI inflation gauge released this morning.

From a month earlier prices increased by 0.3% – the fifth monthly increase in a row – with the annual rate remaining steady at 1.4%.

Here’s TD on the major contributors to the increase.

“Contributing to the overall change in May were price rises for fuel (+4.3 per cent), tobacco (+1.1 per cent) and rent (+0.6 per cent). These were offset by falls in holiday travel and accommodation (-0.5 per cent), newspapers, books and stationery (-1.3 per cent), and non-alcoholic beverages (-2.2 per cent)”.

Despite the monthly rise, with underlying inflation expected to fall to the lower-end of the RBA’s 2-3% inflation target in the June quarter this year, TD Securities chief Asia-pacific macro strategist Annette Beacher believes the RBA will insert an explicit easing bias into its June monetary policy statement tomorrow.

“Using mid-quarter prices, our June quarter headline inflation measure rose by 1.0 per cent, while our trimmed mean measure rose by 0.6 per cent. While these are solid price increases, they are weaker than that observed a year ago, hence why annual rates remain benign. While we will finalise our June quarter CPI forecasts with our June Inflation Gauge report, at this stage we see annual underlying inflation easing into the bottom half of the RBA’s two to three per cent target range.

The RBA has expressed some doubt about the reliability of the capital expenditure survey, however, the persistent weakness in 2015-16 services investment plans cannot be dismissed, and low inflation is no impediment to further easing should that be required. We expect this tone and explicit easing bias to be voiced at tomorrow’s RBA Board meeting, along with leaving the cash rate at 2 per cent.”

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