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Analysis: NAB Business Survey still points to very strong inflation pressures

• This week we update our analysis of the inflation reads in the NAB Business Survey and what this may mean for CPI pressures in Australia, particularly in Q3. Our mappings suggest core inflation could print as high as 2.0% q/q in Q3, which if realised could see trimmed mean inflation at 6.1% y/y in Q3!
• We have not finalised our forecast for Q3 CPI, but the mapping does suggest core inflation is yet to peak in Australia.  Note for Q2 our mapping implied a 1.6% print, and trimmed mean CPI came in at 1.5%. If we assume some volatility in the survey and some retracement, that would still point to a print >5% q/q for Q3.
• Labour cost growth in the survey also remains strong and according to our earlier mapping work aligns best with total compensation of employees (rather than the more narrowly defined WPI). Our updated mapping is consistent with compensation of employees lifting by a whopping 3.8% q/q. Wages is one part of the story, as is hours.
• Looking forward the survey provides some tentative evidence that the peak in inflation may be near, but overall price pressures remain very elevated. Purchase cost growth in construction and manufacturing has now eased for two consecutive months, along with a sharper fall seen in the mining industry, the latter likely oil.
• The easing in purchase cost growth in construction and manufacturing accords with anecdotes your scribe has heard on the road from clients with imported steel and timber costs falling, while freight rates globally have fallen sharply and on some indexes are down almost 50% y/y. Global oil prices have also fallen since early 2022.
• Offshore, business surveys are showing some moderation in the prices paid components for manufacturing (goods) with falls seen in the US ISM and Chinese PMIs, which tend to correlate with the NAB Business Survey purchase cost series with a lag of up to six months at turning points in a cycle. Non-manufacturing prices remain high.
• Final prices charged in contrast have not seen as great an easing as for purchase costs, perhaps suggestive of pricing power, and/or delayed pass through of higher input costs. Purchase cost growth has outpaced final prices by the largest amount in the history of the survey. Margin compression has been seen in recent profit reporting.
• The wages bill trends remain very strong, though the reads have been clouded by the minimum and award wage increases. In 3m moving average terms there is nothing in the survey to suggest any significant easing of wages bill pressure in the survey. Latest permanent and long-term arrivals data have picked up to be just 11% below July 2019 levels, but departures have also picked up, with net arrivals 50% below July 2019 levels.
• When should we expect some alleviation in price pressure? Offshore business surveys as noted above suggest manufacturing and goods inflation pressures are easing (from elevated levels). Australia generally lags these trends by 4-5 months. Outside of these global influences, the labour market remains tight with the RBA likely to continue to hike rates into mildly restrictive territory. Strong survey data if replicated in activity data may also suggest it is too early for the RBA to step down the pace of rate hikes.

Chart 1: NAB survey implies a hot Q3 CPI

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