AMW: Delving deeper into the NAB Survey on costs & prices

It’s clear that with unemployment close to full employment levels and inflation way above target and forecast to rise higher, Australian interest rate settings should no longer be anywhere close to the emergency low settings implemented in the pandemic.

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Analysis: Delving deeper into the NAB Survey and the sharp increase in input costs, labour costs and prices

  • We’ve been fielding quite a few questions from large businesses asking what number they should use for their CPI forecast for the 2022/23 Australian financial year about to begin. While it’s important to consider developments relevant to your industry, NAB’s forecasts suggest a figure of around 4.4% (for the average increase between 2021/22 and 2022/23) and of 3.25% for the June quarter 2023 compared to the June quarter 2022.
  • The course of fuel prices and an expected moderation in housing and durable goods demand are key developments to track in relation to this forecast. We delve deeper into the April NAB Business Survey in relation to cost and price developments.
  • The NAB Survey revealed the surge in input costs continued in April. Disaggregated industry data suggest the most recent acceleration reflects surging energy prices related to Russia’s invasion of Ukraine. The previous acceleration was more reflective of the very strong demand for goods and construction materials, which have added to supply chain disruptions and elevated freight rates.
  • Interest rate rises and the reopening of economies to services consumption should help moderate demand and inflation in these sectors that have been so important in driving elevated inflation. Inflation will still be underpinned for the near term by the elevated level of fuel prices and in Australia by a pick-up in wages costs.
  • The April Survey also revealed a pick-up in labour costs in the past two months. The RBA has referred to this – along with business liaison evidence – of a prospective acceleration in wages costs. Further examination suggests the rise is more likely to have been driven by variations in hours worked than by wages, suggesting the WPI, could print on the lower side of market expectations on Wednesday (NAB+0.7% q/q; market +0.8% q/q).
  • This still marks a further pick-up in wages growth. That said, the RBA can be expected to continue to weight highly its business liaison evidence about firms’ plans to pay higher wages, meaning NAB continues to expect a further 25bp increase in interest rates at the June, July and August meetings, with the chance of a 40-50bps increase in August if the Q2 CPI prints strongly as we expect.
  • An expected drop in the unemployment rate below 4% on Thursday (NAB 3.8%, market 3.9%) should keep the market focused on the need for further interest rate rises and the lower importance of Wednesday’s WPI print if it prints on the low side. The RBA Board Minutes tomorrow will also be examined for any further insight into the Board’s deliberations at its May Meeting that saw the commencement of the interest rate tightening cycle. Either way, it’s clear that with unemployment close to full employment levels and inflation way above target and forecast to rise higher, Australian interest rate settings should no longer be anywhere close to the emergency low settings implemented in the pandemic.

Chart 1: Key Markets over the past week

Chart 2: Chart of the week: variation in hours driving labour costs

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