Australian CPI Preview: Forecasts from six major banks, inflation to have declined further

We expect headline CPI to print at 0.8% QoQ in Q4, which would see annual inflation slow sharply to a two-year low of 4.3% YoY. Trimmed mean inflation forecast is expected to be a little stronger than the headline measure at 0.9% QoQ and 4.4% YoY. But this would still be the lowest quarterly result since Q3 2021. A result in line with our forecasts would be lower than the RBA’s latest forecasts of 4.5% YoY for both headline and trimmed mean inflation in Q4. This should be enough to stay the RBA’s hand at its February 5-6 meeting. However, we expect non-tradables and services inflation will still be very strong in Q4, with six-month annualised rates of around 6% and 4½% respectively. This suggests that further rate hikes aren’t fully off the table yet, although our base case remains that the cash rate has peaked at 4.35% and that the next move is down (in late 2024). The monthly CPI indicator is forecast to slide to 3.7% YoY in December, which would be a two-year low.

We expect the CPI increase to come in at about 0.8% MoM, which would take the inflation rate all the way down from 4.3% to only 3.5% YoY, within spitting distance of the RBA’s 2-3% target. That’s all very well, but the run rate for Australian monthly CPI is still way too high to take inflation meaningfully lower in the medium term. We will need to see this slow markedly over the first half of the year if rate cut expectations are not to turn sour.

Our December quarter CPI forecast is 0.8% QoQ / 4.3% YoY. The Trimmed Mean forecast is 0.9% QoQ / 4.4% YoY. At 4.3% YoY, headline inflation is forecast to come in a bit softer than the RBA forecast of 4.5% YoY. At 4.4% YoY for the Trimmed Mean, our forecast is marginally softer than the RBA’s forecast of 4.5%. Our forecast for inflation is consistent with our current view that the RBA will remain on hold at the February meeting and that the RBA will be reducing the cash rate at the September meeting later this year.  For the December Monthly CPI Indicator, we forecast a 3.0% YoY increase which would be a 0.3% increase in the month.  

We expect Dec monthly CPI to continue to decelerate to 3.5% YoY in part aided by base effects and some pullback in recreational prices from lower airfares. Factoring in our Dec f/cs and the Oct/Nov prints, we project Q4 headline CPI at 0.7% QoQ, more dovish than the RBA forecast at 1.0% QoQ, and pins annual inflation at 4.2% YoY. A cap in utilities fees from subsidies and lower transport inflation are likely the main drags to Q4 headline inflation while for trimmed mean, we suspect price pressures may be a tad stickier. We project trimmed mean at 0.8% QoQ, 4.2% YoY, lower than the RBA's f/c of 1.1% QoQ. While the deceleration in inflation is making good progress, we doubt the RBA will be convinced that annual trimmed mean inflation will return to the 2-3% target this year. Upside risks to inflation remain, especially after scheduled tax cuts to commence in Jul'24, possible cost of living relief before the May'24 Budget and no evident improvements in productivity. We have the first RBA cut penciled in for Aug.

We forecast a further decrease in monthly headline inflation to 4.0% YoY in December, with the housing and recreation/culture sectors likely to have been the two main drivers of the decline given high base effects. We also expect the 4Q23 data to show a decrease in both year-on-year and quarter-on-quarter inflation. The decline in inflation we anticipate would support our base scenario of no further hikes in the RBA policy rate. 

We reduce our headline Q4 CPI inflation forecast by 0.3pp to 0.7% QoQ with the trimmed mean forecast also reduced marginally by 0.1pp to 0.9% QoQ, while the weighted mean forecast is now 0.8%. Over the year, headline inflation is expected to be 4.2%, while underlying inflation is forecast at 4.3%. Crucially, both these projections are below the RBA’s SMP forecast from November, which had both headline and underlying inflation at 4.5%. If our forecast is correct, and both headline and underlying inflation undershoot the Bank’s SMP projections, then it’s unlikely the RBA will hike in February. However, we keep our call unchanged of one more hike and will readjust the cash rate view following the CPI data.