US Inflation – Encouraging, but don’t extrapolate blindly to Australia
Recent US CPI prints have shown good progress on disinflation. Various measures of underlying inflation have cooled meaningfully in recent months, and progress is evident not just on shelter and goods disinflation, but broad based across much of the basket, including for so-called stickier prices.
US inflation dynamics have tended to be ahead of those in Australia this cycle, in part because of the earlier reopening from the pandemic there. With the extensive commonalities in the inflationary shocks across advanced economies, in this weekly we take stock of recent developments in the US CPI, see how inflation over the past few years has compared across different components with the Australian experience. We highlight some important differences that mean we can’t neatly extrapolate from recent developments in the US to the Australian context in the near term
A couple of key insights are that services inflation outside of rents over the past few years is broadly comparable between the US and Australia, but that more rents inflation has already been measured in the US where the outlook is for some further cooling. In Australia, rents are likely to remain strong in the Australian CPI until well into 2024 at least. Energy inflation has also turned negative in the US, but government policies and intervention in Australia in fuel and household energy prices have shifted the timing of passthrough, meaning energy is not subtracting from inflation locally. Recent slowing in goods inflation is likely to continue, and goods are expected to be supportive of the outlook for disinflation in Australia.
Recent US CPI prints have been encouraging, but there remain risks on the path to return inflation sustainably target while nominal income growth remains robust and labour markets remain tight. In Australia, while there has been genuine progress from peaks in quarterly inflation last year, we see the risk that Q3 outcomes, driven by cost pressures including from higher labour costs, rents and energy costs, will pressure the RBA. NAB pencils in one additional hike from the RBA in November, but does not expect another hike from the US Federal Reserve this cycle.
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