Australia CPI Preview: Forecasts from seven major banks, inflation data to be a key variable for the RBA

We expect Q2 CPI to show little sequential progress reducing underlying inflation even as YoY rates move lower. While we pencil in trimmed mean inflation of 1.1% QoQ and 6.0% YoY to be in line with the RBA’s May SoMP of 6.0% YoY, we expect the details around services to be less favourable, flagging the risk of a slower return of inflation to target than in the SoMP profile. For headline inflation we see 0.9% QoQ and 6.1% YoY, driven by a big drop in domestic accommodation and travel prices (the RBA May SoMP had 6.3% YoY). The detail of the Monthly CPI indicator should be a reasonable guide, and NAB’s view coming from these prints was that while headline was easing, services inflation looked sticky (as it has been offshore). A further tightening in policy therefore will be needed to have greater confidence in getting inflation back to 3% by mid-2025 and we continue to expect the RBA will raise the cash rate in August and to 4.6% over the coming months.

We expect both headline (+6.2% YoY) and trimmed mean inflation (+5.9% YoY) to have moderated in Q2. The RBA will likely take comfort that inflation appears to be falling in line with, or a touch faster than, its May forecasts. The RBA forecast Q2 headline inflation of 6.3% YoY and trimmed mean of 6.0%, each 0.1ppt above our forecast. While the August meeting is live, an inflation outcome around our forecast would support our expectation that, on balance, an extended pause from the RBA is now most likely (including no move in August).

We forecast a 1.1% rise in the June quarter taking the annual pace down 0.7ppt to 6.3% from 7.0%. We believe that December was the peak for annual inflation in this cycle and the pace is expected to continue to moderate from here. The Trimmed Mean is forecast to lift 1.1% in June, a moderation from the gains in March (1.2%), December (1.7%) and September (1.9%). The annual pace for the Trimmed Mean is set to moderate from 6.6% to 6.0%. We see the 6.9% pace in December 2022 as the peak in that measure in core inflation. Overall, the June quarter CPI is set to confirm that inflationary pressures peaked in late 2022 and continue to moderate as we move through 2023. However, it will also continue to highlight that core inflation remains significantly above the top of the RBA’s target band and is not likely to return to being within the band any time soon.

A pivotal CPI release which likely decide if the RBA hikes or pauses again in Aug. For Q2, we are below consensus on the headline (6.1%) though think the trimmed mean could surprise higher (6.1%) given sticky price pressures in housing and services-related categories. As such, we see the RBA focusing more on the core and supporting our view of a hike by 25 bps in Aug.

We expect monthly headline inflation to have fallen (YoY) from 5.6% in May to 5.4% in June, led by the housing and transport sectors. We acknowledge that the decline in inflation will likely have been insufficient to fully support the termination of the RBA’s tightening cycle and therefore continue to expect further RBA rate hikes, in the form of at least one more 25 bps hike.

We expect Australia’s headline Q2 CPI to decelerate to a 1% increase, implying a yearly reading of 6.2%. Meanwhile, underlying CPI is expected to increase by 1.2%, the same pace as Q1, implying a yearly reading of 5.8%, still significantly above the RBA’s 2%-3% target band. Headline inflation will likely be muted by the volatile travel category in Q2 while  still-ongoing services price increases imply that underlying inflation should be higher. Although slightly below the RBA’s May SMP forecasts, if realized, it would support the argument for at least one 25 bps rate hike from the RBA in August.

The consensus forecast is for Q2 headline inflation to slow to 6.2% and trimmed mean inflation to slow to 6.0%, while weighted median inflation is seen slowing to 5.4%. Considering that the labor market remains very tight (June employment rose 32,600 and the jobless rate held steady at 3.5%), we believe RBA policymakers may be sensitive to an upside surprise. If underlying inflation shows only a slight deceleration, and by less than the consensus forecast, that could be enough for the RBA to hike its policy rate 25 bps at its August announcement.