We expect Q2 CPI next Wednesday (26 July) to show little sequential progress reducing underlying inflation even as y/y rates move lower. While we pencil in trimmed mean inflation of 1.1% q/q and 6.0% y/y to be in line with the RBA’s May SoMP of 6.0% y/y, we expect the details around services to be less favourable, flagging the risk of a slower return of inflation to target than in the SoMP profile.
For headline inflation we see 0.9% q/q and 6.1% y/y, driven by a big drop in domestic accommodation and travel prices (the RBA May SoMP had 6.3% y/y). The detail of the Monthly CPI indicator should be a reasonable guide, and NAB’s view coming from these prints was that while headline was easing, services inflation looked sticky (as it has been offshore).
Elevated services inflation underscores the size of the disinflation task still ahead for the RBA even as some of the initial goods and construction drivers of inflation have faded. We expect core market services inflation excluding travel to show no moderation, running at similar rates to late last year and annualising above 6%, supported by cost pressure through wages, rents, and energy.
Looking to Q3 CPI, large price rises are expected in telcos, insurance, and postal, while firms will also be assessing the ability to pass on costs from wage rises, including from award wage increases, and from higher energy costs. Note the direct impact of higher energy costs on consumer electricity bills is expected to be about fully offset by government subsidies. While lowering the ‘measured’ price level over 2023/24, the eventual unwind of subsidies will add to inflation thereafter.
Overall, while we do not expect the Q2 outcome to sharply surprise the RBA’s May forecast, we do think that the detail will be indicative of some persistence in inflation pressures that the RBA has been citing as a risk. We expect trimmed mean inflation to fall to 4.3% y/y by years end, which will be above the 4.0% forecast by the RBA in their SoMP. A further tightening in policy therefore will be needed to have greater confidence in getting inflation back to 3% by mid-2025 and NAB continues to expect the RBA will raise the cash rate in August and to 4.6% over coming months.