CPI playbook

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Today we have Australian Q2 CPI. My best guess is that Q2 headline CPI will be around 0.25%qoq, which will take headline inflation down to 2.25%yoy (which is below 2%yoy once the carbon tax is taken out). The key core measure is the trimmed mean, and this is likely to be around 0.5%qoq, which will take trimmed mean inflation down to 2.1%yoy (also below 2%yoy once the carbon tax inflation is taken out).

So the Australian macro situation is this: the unemployment rate is trending up and inflation on both headline and core measures is likely to be below the bottom of the RBA’s target range. This ought to make it pretty easy for the Bank to cut rates in August.

What this tells us very clearly is that the RBA has had policy too tight over the last year or so. Inflation should not drop so low when the cash rate is so high (yeah it’s low for us, but it’s 275bps away from being ineffective).

So what if my inflation forecast is wrong? Well, the RBA could still cut rates with inflation that’s a bit elevated — so long as the high inflation is due to high tradable goods inflation. Historical averages suggest it is too early to see tradable inflation from the AUD’s Q2 plunge, however if it shows up the first round effects can be ignored as the AUD must reset lower for the economy to rebalance.

So, even if inflation is above 0.5%qoq, the RBA might cut in August, so long as non-tradable inflation is tame.

Fair pricing would be around an 85% chance of a cut if CPI is as i expect. I do not think the likely calling of a federal election will stop the RBA from easing in August – or any other month.


  1. It’s interesting how little commentary (apart from here!) on the CPI figure and expectations around it mention the one-off effect of carbon pricing, which I’m guessing is about 0.4% y/y. In my view, most of the increases in utility prices over the last 5-7 years should have been excluded from monetary policy deliberations, as the historical increases largely reflect higher network costs, which are lumpy and if anything related to demand 3-5 years earlier. The only component of electricity prices that ought to matter is wholesale prices, and they have fallen considerably over the last 5 years (allowing for carbon) due to falling electricity demand.

    1. Interesting. I’d take it even further. Ignore CPI completely and just watch asset prices, transaction volumes and credit growth.

  2. waah,

    what happened to mt pedantic point that there is no carbon tax only an ETS with a fixed price.

    The RBA is known to look at the annualised six month figure!!

    Of course Castle is much more important.

    Or maybe the death of austerity as well!

  3. I do not get this “higher-inflation-worry” because of a lower dollar. If I can spend X every month, and that’s my budget, that is what I will spend. If imported goods are more expensive I’ll save somewhere else. What counts is aggregate demand, what we are all willing to spend and that’s mainly credit growth. If we have a spike in tradable inflation because of a higher dollar (I do not expect that), then it’s going to be non-tradable that will slow down to make room (and we get all poorer but more productive/competitive). But on balance, just a lower dollar won’t impact the current saving rate and so inflation won’t be a problem. Q2 CPI is too early anyway to tell.

  4. Non-tradables inflation lifted by 0.5% (it’s low, but June non-tradables tend to be always low)

    1. It won’t be pretty if they don’t cut, because if not now, then when? ie they would be indicating they are happy with the way things are going, which is not great.

      Ricardo, for dilettantes like me, can you please explain (or point to something that explains) why the trimmed mean is more important that the weighted median? Looks like you were spot on with the TM figure if not the headline.

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