Australia: Q2 underlying inflation to pick up gradually to 1.82%/yr - TDS

Analysts at TDS are looking for the Australian Q2 trimmed mean to increase by +0.6%/qtr, picking up from 1.86%/yr to 1.93%/yr, and combined with a +0.55%/qtr lift in the weighted median measure (or 1.71%/yr), they see overall annual underlying inflation creeping up from 1.76%/yr to 1.82%/yr.

Key Quotes

“Inflation in Jun rose by +0.1%/mth, the annual rate easing to +2.3%/yr. Domestic inflation rose by +0.2% in the month to be 3.1%/yr, while tradable inflation was flat.”

“The trimmed mean measure rose by +0.2%/mth, the annual rate easing from 2.1% to 1.9%/yr. We expect Q2 underlying inflation to pick up gradually from 1.76%/yr to 1.82%/yr, released July 26.”

“Our forecasts are consistent with the RBA’s May projections (core rising to 2%) and so supports its onhold stance. The OIS strip is flat to cash through to year end, almost pricing a full hike by end-2018.”

“June house price inflation at 9.7%/yr remains at lofty levels, not surprising with owner-occupied demand allowed to expand unscathed from macroprudential tools.”

“Inflation well past the lows but not accelerating

Monthly inflation continues to climb from the lows reached last year, and so we expect an upbeat Jun qtr CPI report later this month.

As we say each month, there isn’t a “perfect” relationship between monthly and the more comprehensive quarterly inflation, however, (1) a further pickup in underlying inflation appears inevitable (middle chart); and (2) monthly domestic inflation is accelerating, and we expect that to be reflected in the official Q2 inflation report (top chart). Domestic inflation is what RBA policy can influence.

We expect Q2 headline inflation to increase by +0.6%/qtr and 2.3%/yr. The floods associated with Cyclone Debbie will boost some fresh fruit and vegetable prices, however, fuel prices falling around -3%/qtr provide an offset.

On our projections, we don’t expect Q2 CPI to have a material impact on current RBA thinking given that core inflation is rising but likely to remain below 2%. However, such an outcome could dampen recent market enthusiasm for a more hawkish RBA tone in the coming months.”