Q2 CPI: low enough for an August cut

The Q2 CPI result came in around where i was expecting, with headline CPI a little higher (it was 0.4%q/q v. my 0.25%q/q) and trimmed mean CPI at my (and the median economist’s) forecast of 0.5%q/q.  There was something of a sell off on the release, however, as the market over-reacted to the 0.7%q/q for the weighted median CPI.

The fact is that the trimmed mean is the best measure of CPI, and that’s been running below 2% AR for the last two quarters.

Even taking the YoY CPI numbers on face value (that is ignoring carbon) there’s a strong case for a cut. The unemployment rate is trending up, so inflation is likely to fall from here. That means that unless we see a further very large drop in the AUD that we are very unlikely to have seen the low print for inflation.

The fact are that demand is weak, and that inflation (ex carbon) is tame, so i think the RBA will cut 25bps to 2.5% at their August meeting. With the mining boom still to roll over and fiscal tightening probably coming after a change of government, it seems unlikely that this will be the last cut.

I’m still thinking 2% for the low point for cash.

This entry was posted in AUD, economics, monetary policy, RBA and tagged , . Bookmark the permalink.

2 Responses to Q2 CPI: low enough for an August cut

  1. MJV says:

    2% has been my expectation as well, pending any genuinely unpleasant developments in China. What are your thoughts on the risks of something approaching capital flight if the RBA pushes the cash rate sub 2%?

    • Ricardo says:

      I am fairly relaxed about capital’s appetite – the major impediment in the bond market isn’t the level of yields but the flat curve. A 1% cash rate would fix that!

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