March 30, 2022

AMW: CPI Preview – Core inflation to surge further, pressuring the RBA

NAB’s view is the RBA will start to hike by August 2022, depending on whether the RBA pivots to a forward-looking approach to policy.

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Analysis: Core inflation to surge as fuel and homebuilding drive headline

  • Australian Q1 CPI figures are out on 27 April ahead of the RBA May Board Meeting. Given the RBA’s gradual pivot towards a risk balancing approach for setting policy, a blockbuster CPI could see the RBA re-valuate the benefits of waiting to normalise policy. We have decided to publish an early preliminary CPI preview given such risks and we will update our estimates as more information comes to hand.
  • We see Core Trimmed Mean CPI at 1.2% q/q and 3.4% y/y. If realised the six-month annualised would be even hotter at 4.4% and would be on par with some measures of US core inflation given the Dallas Fed Trimmed Mean is running at 4.6% six-month annualised. Note the RBA’s Feb SoMP has an implied 0.8% q/q print.
  • As for the main drivers for core inflation, we expect accelerating consumer goods price passthrough (as reflected in the NAB Business Survey), while fuel and new dwelling purchase costs are again set to skew the distribution of prices and support the 70% trim. Grocery inflation, which was subdued through H2 2021 should also add, while importantly for the outlook rent inflation is expected to pick-up.
  • For Headline CPI we see a 1.7% q/q rise in Q1, taking the y/y rate to 4.7% y/y from 3.5%. Automotive fuel (11% q/q) is again set to lift the headline read, adding over 1ppt to the year-ended headline number. Also supporting is continued price growth in new dwelling purchase costs which is expected to rise 4.0% q/q and add 0.35ppt to headline inflation.
  • Our CPI forecasts, if realised, would again blow the RBA’s February SoMP forecasts out of the water. The RBA had forecast a peak in Trimmed Mean of around 3¼% by mid‑year, which implies quarterly prints of around 0.7-0.8% q/q. Our preliminary trimmed mean forecast of 1.2% q/q is significantly higher and by mid-year we see core inflation well out of the 2-3% band at closer to 4.0% y/y.
  • The RBA has been balancing the “risk of moving too early” given “the opportunity to secure a lower rate of unemployment than has been the case for some decades” with the “risk of waiting too long”. The March Board Minutes suggests risks were “skewed to the upside” for wages and the risks of waiting too long are rising given reports of firms being “increasingly prepared to pass these higher costs onto their customers.”
  • A much higher-than-expected core CPI would suggest the risks of waiting too long are higher. Exactly what figure and what breadth of price rises (outside of wages) would cause a change in balancing the risks is unclear. Our thinking is a core print around 1.2% q/q has every meeting being live from May, while a print of 1.5% q/q would almost certainly lock-in in a May rate hike outside of election considerations. NAB’s view is the RBA will start to hike by August 2022 with every meeting live from May, depending on whether the RBA pivots to a forward-looking approach to policy.



Chart 1: Fuel, goods and homebuilding driving inflation


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