TD Securities thinks there's another shockingly low Australian CPI print on the way

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Be it wages growth, retail turnover in dollar terms or the official consumer price inflation (CPI) figure released by the Australian Bureau of Statistics (ABS), there is a distinct lack of price pressures within the Australian economy at present.

After worrying about the inflation genie coming out of the bottle back in 2008, we’re now in the position where we’re trying to coax him out.

The Reserve Bank of Australia certainly is, cutting interest rates to a record-low level of 1.75% in May following an incredibly weak March quarter core CPI figure – 1.53% – the lowest in the survey’s history.

Well, it could sink substantially lower, leaving it below the downwardly revised inflation forecasts offered by the RBA in its May quarterly statement on monetary policy.

That’s the view offered by Annette Beacher, TD Securities chief Asia Pacific macro strategist, who suggests that the Melbourne Institute’s Australian inflation gauge released earlier this week points to the likelihood of a further deceleration in price pressures during the June quarter.

“More importantly for the RBA, the trimmed mean rose by +0.2%/mth, boosting the annual rate to a still-soft 1.2%/yr,” says Beacher.

It is this figure, rather than the headline index, which surged most since December 2013, and markets should be focusing on, she says, pointing to its relationship with the trimmed mean core inflation figure released by the ABS.

“While there isn’t a ‘perfect’ historical relationship between the monthly and the more comprehensive official quarterly inflation report we see these low outcomes signalling that inflation could again print below the RBA’s revised 1.5%/yr projection for mid-year underlying inflation,” says Beacher.

“We expect the official Q2 trimmed measure to sink from 1.69%/yr to 1.26%/yr, and combined with the weighted median measure, our overall ‘underlying’ inflation forecast sinks from 1.53%/yr to 1.25%/yr.”

Yes, just 1.25% year-on-year. Wowsers. There’s low and then there’s LOW.

As Beacher points out, that forecast, should it prove to be correct, would leave core inflation 0.25% below the low-point in the RBA’s own forecasts.

It would also mark a fresh record-low for the core inflation figure.

“A print this low brings the RBA into play for the August meeting,” she says. “Despite no explicit easing bias today we maintain our call for an August RBA cut to 1.5%.”

“In our view, this is a clear trigger for a cut to 1.5% in August, as real interest rates jump,” she adds.

Plenty seem to agree with that view. Of the 25 economists polled by Bloomberg prior to the RBA’s July monetary policy statement being released, 24 were calling for a further 0.25% rate cut in August.

Cash rate futures are more nuanced, attaching a 56% probability that a rate cut will be delivered.

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