For the full picture, download the report – Australian Markets Weekly 1 July 2019.

• Fruit and vegetable prices are the two most volatile components of the CPI and can have a large effect on headline inflation even though they account for only a small share of household spending.
• This makes forecasting fruit and vegetable prices important when nowcasting the CPI.  Large swings in fruit and vegetable prices can also affect the RBA’s preferred measure of core inflation by skewing the distribution of prices within the CPI.
• With the ABS now using transactions data to measure up to 31% of the CPI basket, NAB has developed a web-scraping tool to track retail fruit and vegetable prices.  Mapping the web-scraped prices across to the CPI, we follow the ABS’s approach in allowing households to vary their spending in response to large swings in prices. In this way, big price changes have a more muted impact on the CPI than in the past.
• For Q2 inflation, web-scraping shows the impact of the Queensland floods has been unwound, with falls in fruit and vegetable prices partly offsetting a 10% rise in petrol, such that we expect a 0.4% q/q / 1.4% y/y rise in the headline CPI.

The week ahead –  RBA expected to cut to 1% on Tuesday

• The RBA Board meets tomorrow in Darwin for the first time with the Governor speaking later that evening.  We expect the RBA to cut the cash rate by 25bp to 1% given that the Governor recently said the June rate cut was not sufficient to “get the [economy] on a better path”.  We are mindful that the Governor also said the decision to cut again could be taken in either Darwin or Sydney, so that if the RBA unexpectedly holds steady we would expect the next cut in August.  . On the data, NAB forecasts a small lift in retail sales of 0.2% in May (mkt: 0.2%) following a 0.1% fall in April. Building approvals are forecast to fall another 1% (mkt: flat) and the trade surplus is expected to lift to $5.8b (mkt: $5.25b).
• Offshore, aside from China-US trade tensions, the focus will be on the manufacturing ISM on Monday, the non-manufacturing ISM on Wednesday, and payrolls on Friday. Any disappointment would increase expectations of a July Fed rate cut.

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