SCOREBOARD: Fine print

The true momentum of underlying inflation is unclear, but this week's CPI print is make-or-break for a rate cut.

In a holiday-shortened week due to Australia Day on Thursday, the consumer price index is the big release for Australia (Wednesday 1130 AEDT). I suspect it’ll either make or break the case for a rate cut at the February 7 meeting, so it’s going to be interesting.

Recall that the third-quarter CPI print – well, the core CPI print – was surprisingly low at 0.3 per cent quarter-on-quarter, following two very high prints of around 0.9 per cent. At face value, that’s a great development.

However there were a few things that made me cautious about instantly accepting the result as a true picture of the underlying inflationary momentum, which is what core inflation should be measuring. Firstly, they were the lowest core prints in at least a decade coming after a surge in inflation in the previous two quarters. Unusual by itself, given inflationary pressure is not normally that volatile, but especially so given economic activity accelerated in the third quarter. Recall that private demand in that quarter was at its strongest in about four years, driven by strong retail spending (especially furnishings and household contents) and discretionary spending more generally (such as cafes, recreation). We also saw very strong broad-based business investment. So it wasn’t just mining.

Also complicating things were the methodological changes introduced by the ABS that quarter. These do seem to have dampened the inflationary momentum somewhat, although that doesn’t mean that the momentum has really changed. It just means we’ve put on a different pair of glasses – but are they the right ones?

More broadly, my view is that inflation will moderate temporarily given the sentiment-induced drop in some commodity prices. The question is to what extent and for how long? If import prices on Friday are any guide, then the inflationary momentum isn’t really weakening any. Import prices surged in the quarter, rising by 2.5 per cent which is the biggest gain since 2008. Price for consumption goods rose 1.7 per cent in the quarter which is the biggest gain in almost three years. Pass through to retail prices is, of course, the issue, and this is by no means perfect. In any case we get another idea of upstream price pressures with today’s producer price series at 1130 AEDT.

For mine, and for reasons I’ll go into later, I don’t see much of a case for the RBA to cut at the moment. That said, if inflation this quarter confirms the slowing we saw in the third quarter, then that’s an entirely different story. So far the consensus is that CPI will rise a mere 0.2 per cent in the December quarter (I’m at a rise of 0.4 per cent), with the average of the trim and weighted median expected to be at 0.5 per cent (I’m also at 0.5 per cent). Fruit, of course, will be a major disinflationary force and it’s likely some other food components will weaken as well. Elsewhere it’s not so clear cut.

Across the Tasman, the RBNZ decision is due on Thursday at 0700 AEDT. No one expects a cut at this meeting, although if there is any sign that the recovery is faltering I think they’ll certainly cut again. The inflation numbers that we saw last week were incredibly weak and a major surprise. It’s unlikely that we’ll see NZ CPI much above 2 per cent for most of this year which clears the way for further cuts if they need it. The strong rebound in consumer spending that we’ve seen so far suggests a further cut isn’t needed though.

Looking around the globe, the dataflow is actually quite light this week. For the US we only get the Richmond Fed manufacturing activity index (Tuesday night), durable goods (for December; Thursday night). Friday night sees the fourth-quarter GDP figures where the consensus is the economy expanded 3 per cent. Other than that, it’s a heavy one for corporate earnings and of course the FOMC meeting is this week, although nothing is expected to come out of it.

Other than that, just watch out for European finance meetings – we’re still hearing good things in relation to the Greek deal being competed – the PMI’s tomorrow night and the German IFO on Wednesday night. For the UK we see fourth-quarter GDP and the BoE minutes on Wednesday night.

Adam Carr is senior economist at ICAP Australia. See Business Spectator's glossary for definitions of technical terms used in SCOREBOARD articles.

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