The NAB's Economics Team Is Making A Big Call On Falling Inflation: Here's Why

Getty/Matt Cardy

Australia’s Q3 inflation data is out this morning at 11.30am AEDT with the market expecting a headline rate of 0.4% to drop the year on year rate from the top of the RBA’s band at 3% to just 2.3% this quarter.

But the economics team at the NAB has an outlier call for a headline print of 0% for the quarter which will move the rate of inflation from the top of the band at 3% to below the bottom of the band at 1.9% year on year.

It’s a huge call relative to the market so we asked Peter Jolly, NAB’s Global Head of Research, what was behind the forecast.

Jolly said his team expects “the story is not so much the quarterly changes, where we have underlying at +0.5% and headline flat. The bigger story is that after rising for the past year – entirely because of the fall in the TWI through mid-2013 – both underlying and headline inflation are about to push down. We expect both to be be at 2% a year from now.”

That would put a fundamentally different reference point on the RBA interest rate outlook with an economy struggling to transition than the one we had just 3 months ago when the headline rate hit 3%.

Jolly told Business Insider that the reasons driving this expectation of lower inflation ahead were fairly straight forward:

  • Some favourable base effects (where larger numbers from previous quarters drop out);
  • An end to the pass-through from last year’s drop in the AUD (the most recent drop won’t show through for several quarters yet);
  • Excess supply and low wages growth keeping non-tradeable inflation subdued;
  • Falling global commodity prices;
  • The abolition of the carbon tax and deregulation of electricity prices in some States which has driven and estimated 5% fall in Q3, which would be the first quarterly decline in electricity prices since 1999.

Jolly notes that if the NAB’s forecast is correct the market might be encouraged to price in another RBA rate cut even though falling inflation won’t be new news to the RBA.

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