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How sticky will Australian inflation be?

• The Australian budget Tuesday night is likely to feature a small surplus for the current financial year, cost of living relief aimed at reducing energy prices and measured inflation, JobSeeker rises for the most vulnerable, a reworked PRRT to raise more money from gas, review & reprioritisation of $120bn infrastructure pipeline and the proceeds from the revised tax on those with superannuation balances over $3m. The tax cuts that begin on 1 July 2024 will be considered in next year’s budget.
• The NAB business survey today revealed that employment intentions and business conditions remain strong, though there has been some welcome reduction in input costs in recent months, though these are still running too strongly for comfort.
• The RBA rate rise last week reflected low unemployment and high inflation and importantly a growing concern by the RBA about persistent high services inflation overseas. Surging rents, lagged energy price rises  and a likely very large minimum wage increase (the government is supporting the ACTU’s claim for a 7% increase) are not likely to bring much relief to the RBA on the services inflation front any time soon and suggest risk of further tightening as the RBA is warning “may be required”.
• In this week’s weekly, we delve into some neat work by the Federal Reserve Banks of Cleveland and Atlanta, which found that some components of the US CPI – the so-called sticky inflation components – have more forward-looking information about inflation. Interestingly, some of these components are now moderating back to 3-4% rates, which may be instructive in time about how sticky inflation will develop in Australia, given the US seems ahead of the Australian inflation cycle.
• Consistent with growing concern by the RBA about sticky inflation, this Australian sticky inflation measure has been “stuck” at a 6% annualised rate in the past three quarters. And with rent rises, wage rises, and energy price rises suggesting little near term relief, that is likely to remain a concern for the RBA going forward, suggesting the risk of further tightening being required.

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