Australian Q3 inflation report due this week – preview

Australian Q3 inflation report due this week – preview

Official Australian inflation is published by the Australian Bureau of Statistics for July to September 2017

  • Official CPI is only once a quarter
  • On Wednesday we get Q3
  • Due at 0030 GMT Wednesday 25 October 2017

For the 'headline':

  • expected is +0.8%,
  • prior was +0.2%

For the y/y,

  • expected is 2.0%, prior 1.9%

For the 'trimmed mean' (which is the measure the RBA pays most heed to – it is a 'core' inflation figure where the RBA target band is 2 -3%.

q/q:

  • expected 0.5%,

  • prior 0.5% q/q

y/y:

  • expected is 2.0%, prior 1.8%

Finally, there is the 'weighted median' CPI, also a core measure:

  • q/q: expected is 0.5%, prior was 0.5%

  • y/y: expected is 2.0%, prior was 1.8%

If those trimmed mean and weighted median (i.e. the core measures) hit expectations, or are higher, core inflation will be back at the RBA target band (albeit at the bottom end) for the first time since the December quarter of 2015. With still strong employment growth this will move the Reserve Bank of Australia a little more towards hikes (we are not there yet, there is not yet the case for a hike soon).
Preview via National Australia Bank (formatting and bolding mine):
Hefty increases in electricity and gas prices are expected to be the defining feature for headline inflation, but how much it could flow to underlying measures in this quarter and in the quarters ahead is more uncertain and dependent on the ability of firms to pass on higher costs to consumers.

  • NAB expects headline CPI to rise 0.8% q/q and 2.0% y/y
  • Higher electricity and energy prices will contribute the lion's share (adding some 0.4% points to growth in the quarter)
  • Acting as some offset is a fall in petrol prices and a decline in vegetable prices… There may be some downside risk to our forecast if retail vegetable prices fall as far as wholesale prices; wholesale vegetable prices fell 16% which we moderated to a 4% decline in the CPI

Core inflation is likely to remain stable

  • with the Trimmed Mean (0.5% q/q and 2.0% y/y)
  • and the Weighted Median (0.4%/1.9%) both mirroring recent growth

Q3 CPI along the lines we are expecting is broadly on track with the RBA's August Statement of Monetary Policy forecasts
As for the outlook, inflation is only expected to rise gradually and this quarter's CPI will likely support that expectation

  • There is the risk that higher electricity prices could have second round effects and it will be important to monitor whether firms have the pricing power to pass such cost rises on to their buyers – the NAB Business Survey Prices series suggests not yet at least

For the RBA, it will be important to see whether inflation has truly bottomed as the steady core figures over the past three quarters would suggest

  • If so, inflation should gradually lift as the labour market tightens
  • NAB expects the unemployment rate will be low enough by mid-2018 to give the RBA confidence in wages and inflation picking up
  • This would place the RBA in a position to remove some of the stimulus in place and NAB's forecasts sees the RBA hiking rates twice in the second half of 2018.

Original Article