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.