CPI preview – December quarter 2012

• We expect the December quarter CPI release (due 23 January) to confirm that inflationary pressures remained moderate in the final months of 2012.
• We expect a core inflation rate of 0.7% (2.4% through the year; including the impact of carbon), which is unchanged from the September quarter outcome and well within the RBA’s comfortable range. Headline CPI inflation is expected to be softer, at 0.4% (2.4% through the year), largely reflecting weakness in fruit & vegetable prices. Petrol will be relatively neutral.
• The continued strength of the Australian dollar together with a weakening economy and price discounting means that near term inflation remains moderate. Consistent with those forces NAB business survey data also show subdued price pressures at end 2012.
• While a February rate cut will be discussed at the next board meeting, they already have done a lot. A low core CPI would probably be needed.  We see the tipping point at 0.6% or lower (or 0.5% ex carbon). Hence we still see a March cut as more likely but it will be a close run thing.
• Looking further ahead, the weaker activity outlook for the domestic economy is expected to help contain inflation to below 3%, even when the impact of carbon pricing is taken into account. That will allow the RBA to focus more on cutting to help non mining sectors of the economy.
• With the unemployment rate expected to rise to near 5¾% by mid year, we still see the need for three 25 bps cuts, which we have tentatively pencilled in for March, May and August.

For further analysis download the full report.

• CPI preview – December quarter 2012 (PDF 58KB )