Analysis: Inflation print was real, RBA will need to revise up its track
In this Weekly we explore how likely it is the upward surprise in core inflation will be sustained. In summary we think the next few quarters of inflation prints could be strong. The RBA will need to revise up its inflation track in the near term. Back in August the RBA only had core trimmed mean inflation hitting 2% by mid-2023. Trimmed mean is already there at 2.1%y/y.
The next few CPI prints could be very strong. Our own forecasts now see quarterly trimmed mean inflation printing at around 0.6% a quarter for the next three quarters, which would take core inflation up to around 2.6% y/y by mid-2022. From there, near term drivers are expected to give way to a more sustained uplift in underlying inflation. That contrasts sharply with the RBA’s August SoMP which only had core inflation at 1½% by mid-June 2022.
The Q3 CPI data reveals retailers are passing on higher costs due to supply chain disruptions. This will likely continue into Q4 and Q1 2022 with import prices lifting strongly in Q3. Higher retail prices are a theme also seen in the NAB Business Survey, with similar high prices also being felt in the wholesale industry. Interestingly, just prior to the lockdowns in Q3 the household services industry saw price growth returning to pre-pandemic levels. Services inflation in Q3 though was clouded by lockdown impacts and policy initiatives.
New Dwelling costs, which notably rose an outsized 3.3% q/q in Q3 are likely to increase strongly again. Non-lockdown QLD in Q3 saw new dwelling costs lift an outsized 7.9% q/q and we see no reason why strength shouldn’t continue in NSW and VIC in Q4 and into Q1 given the end of lockdowns. The unwind of the homebuilder stimulus impacts will continue to support construction prices in 2022.
New dwelling construction has an outsized impact on core inflation given it represents 8.5% of the CPI basket. Last quarter was the first time since at least 2006 that it was included as one of the high price increases looked through for the trimmed mean calculation. The large weight means that many price increases that would otherwise be excluded remain in the underlying calculation. The dynamics of this large component have the potential to skew underlying inflation higher in an environment where idiosyncratic pressure are driving localised large price increases.
With core inflation likely to be forecast to be within the band for “several” quarters, focus will be on the RBA’s view on wages for their assessment on whether the pick-up in core inflation to within the 2-3% band will be sustained. There has been little new data on wage (the next wages print is on Nov 17), though there are reasons to think the RBA’s view on wages may have been as conservative as the inflation view.
NAB recently brought forward its view of the first cash rate hike to mid-2023 with a relatively aggressive series of hikes thereafter to bring the cash rate to 1.75-2.00% by end 2024. We also think the RBA will end their YCC target and also end QE by February 2022. See (NAB Monetary policy call)
Chart 1: Consumer goods pipeline showing price pressures, less so in services