CPI preview – March quarter 2013

• With little indication of inflation pressures emerging in the early months of 2013, we expect the CPI release (due 24 April) to confirm that underlying inflation remained subdued in March quarter 2013.
• We see underlying inflation remaining within the RBA’s target over the medium to longer term, with soft consumer spending, below-average labour cost pressures, a still high AUD and a shift in business focus towards increased efficiency expected to keep price pressures well contained.
• Core inflation in the March quarter is expected be 0.5% (2.5% through the year; including the impact of carbon), unchanged from the December quarter outcome and well within the RBA’s comfortable range. Headline CPI inflation is expected to be a little stronger, at 0.7% (2.8% through the year), largely reflecting seasonal strength in a number of the CPI components, including pharmaceuticals, utilities, fruit & vegetable prices and automotive fuel.
• While ‘green shoots’ are emerging in official data for employment and retail trade, with equity and house prices strengthening as well, forward indicators of demand remain subdued and point to the prospect of continued sluggish growth over at least the first half of 2013.
• The appreciation of the Australian dollar together with soft consumer demand is expected to have kept underlying inflation well contained in the March quarter. The NAB Quarterly Business Survey suggests retail inflation was almost non-existent in the March quarter.
• Like us, the RBA seems very comfortable with the outlook for underlying inflation, stating in the minutes of its April meeting that “the inflation outlook, as assessed at present, would afford scope to ease policy further, should that be necessary to support demand”. This raises the question, “what is the tipping point for further policy easing?”. No doubt the RBA will remain focused on the performance of the non-mining sector, and in particular, the impact that previous stimuli are providing to this sector. But we remain unconvinced at this point that the non-resource sector will be able to fill the hole caused by the imminent passing of the resource investment peak next financial year,
• Combined with the expected rise in the unemployment rate to near 5¾% by mid year, these inferences imply the need for a further two 25 bps cuts, which we have tentatively pencilled in for June and November. However, timing is still very fluid, with higher house prices a possible delaying factor.

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• CPI preview – March quarter 2013 (PDF 58KB)