Market Watch

Exploring the crux of core inflation ahead of this week's data drop, with Chief Market Strategist Evan Lucas.

By ·
20 Apr 2018

As the Banking Royal Commission rolls on this week, expect more fallout in the financial sector. This week is also split down the middle because of the Anzac Day public holiday, therefore, trade volumes and patterns are likely to be irregular and inconsistent.

However, this week we will get one of the biggest macro-economic data releases for Australia – the quarterly Consumer Price Index (CPI) read.

The granular 

Here are the expectations for Q1 CPI figures (all consensus figures sourced from Bloomberg):

Headline CPI

March quarter consensus: 0.5 per cent quarter-on-quarter (qoq) and 2 per cent year-on-year (yoy). Previous readings, December quarter: 0.6 per cent qoq, and 1.9% yoy – both figures missed the December consensus.

The Reserve Bank of Australia’s (RBAs) trimmed mean

March quarter consensus: 0.5 per cent qoq and 1.8 per cent yoy. Previous quarter 0.4 per cent qoq, and 1.8 per cent yoy – again, both missed consensus.

The RBA’s weighted median

March quarter consensus: 0.5 per cent qoq and 1.9 per cent yoy. Previous quarter 0.4 per cent qoq, 2.0 per cent yoy – the quarterly figure missed consensus by 10 basis points (bps), while the yearly figure beat by 10bps.

What to watch for

Oil prices in the first quarter increased, as did food. This should feed into the headline figures. Fuel was a large driver of inflation in the December quarter. 

Housing is going to be key to the core figure, having been a major contributor to core inflation over the past three years. The slowdown in the Sydney and Melbourne housing markets is likely to have taken points out of the trimmed mean and weighted mean figures. The question then becomes whether rents pick up the slack left by housing – rents began to reaccelerate in the back half of 2017.

‘Tradeables’ items such as clothing, furnishings and electronics may also see an increase over the quarter, considering the Australian dollar has declined steadily since January 1, which should naturally add pricing pressure. These items have been soft in the past two quarters. A caveat, the data covering disposable income has shown a steady incline across the first quarter of the year.

The RBA 

The RBA has been at pains to point out that inflation is beginning to materialise, however, this is mainly due to volatile components that make up the headline inflation read such as fuel, food and tobacco. Excluding volatile items the inflation trend is much more benign.

The blue band illustrates the RBA’s target range for core inflation.

All three metrics for core inflation haven’t crossed into the target band since the September quarter of 2015. What is more telling is the flat lining trend of the past three quarters in core inflation. Trimmed mean and weighted mean have remained steadfast at 1.8 per cent over this period, showing no signs of gapping up the remaining 20bps to hit the bottom-end of the band. Any sense of urgency the RBA is feeling to hike rates remains constrained by the fact its core mandate is not being met.

Further confirmation on Tuesday that CPI in Australia remains sub-trend is a further confirmation that rates are likely to remain on hold for 2018 and even into 2019.


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