CPI preview – December quarter 2013

We expect Q4 underlying inflation to print at 0.6% (2.3% through the year) on Wednesday. This would be the fifth successive outcome in the bottom half of the RBA target range. Subdued wages growth and weak domestic demand continue to keep core inflation well under control.

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Wednesday’s CPI likely to confirm low inflation environment: still well inside RBA comfort zone.

  • We expect Q4 underlying inflation to print at 0.6% (2.3% through the year) on Wednesday. This would be the fifth successive outcome in the bottom half of the RBA target range. Subdued wages growth and weak domestic demand continue to keep core inflation well under control. Although the AUD was 8% lower, on average, in the second half of 2013 than the first half, it is unlikely to have had a significant effect on consumer price inflation in Q4.
  • Headline CPI inflation is expected to be 0.5% (2.4% through the year), with the effects of a tobacco excise hike more or less offset by lower fuel prices and a seasonal decline in pharmaceutical costs.
  • We expect underlying inflation to gain only a modest amount of momentum over the coming year as the AUD depreciation passes slowly through the wholesale-retail supply chain. A soft labour market restraining wage cost growth and the prospective removal of the carbon tax can be expected to help contain underlying inflation well within the RBA comfort zone.
  • For the RBA, these numbers would keep inflation out of play in terms of policy formulation. Rather, the RBA is likely to continue its focus on jawboning the AUD to a lower level and monitoring the rate at which the labour market weakens through the course of the first half of this year.

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