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Q1 CPI Preview – Past the peak, but still too high

• We expect Q1 CPI next Wednesday (26 April) to confirm inflation peaked in Q4 2022 and to have decelerated marginally more than what the RBA had pencilled in back in February. We see trimmed mean inflation at 1.3% q/q (6.6% y/y), one tenth softer than the RBA’s February forecast of 1.4%. For headline we see a 1.3% q/q (7.0% y/y).
• Even though we expect inflation to come in marginally softer than the RBA’s SoMP forecasts, we think those forecasts are dated given the monthly inflation indicator.  A print in line with our forecasts would not remove the risk of a May hike which we see as a close decision given the RBA debated 0 or 25bps in April with a strong case given in the Minutes for moving by 25bps in April.
• In our forecast detail, welcome relief on goods price inflation has been signalled by the Monthly Inflation Indicator, and we expect outright price declines among many household goods and clothing categories. New dwelling construction cost inflation has also decelerated according and should support disinflation over 2023.
• A key source of uncertainty for Q1 is the speed and timing of the measured reversal in travel and accommodation prices after a December surge. Excluding travel, market services (a closely watched indicator of domestic, labour-market sensitive inflation) is expected to remain around the very elevated levels of the last 2 quarters.
• Looking further out, housing, the largest component of the CPI, is key to the outlook. Slower new dwelling inflation over 2023 is expected to subtract 1.3ppt from y/y CPI relative to 2022. On the other hand, still accelerating rents, with no relief in sight, are seen adding 0.5ppt. Utilities prices are expected to show ongoing elevated inflation in Q1 and through the year.
• As for the annual inflation, at the headline level that is expected to fall to 7.0% y/y from 7.8%, helped by base effects. Inflation a year ago was 2.1% q/q, its highest quarterly gain since 1990. Lower fuel and construction contributions relative to a year ago account for almost all of the fall in the headline number.

For the full detail and analysis, see attached report.