The Trade Week Ahead – RBA’s Inflation Trap

Watch for irregular and patch trade with ANZAC day dividing the trading week in half. Monday and Tuesday are likely to be light in volume and direction due to a close of the market. Index and equities locally will be most affected.

Off that and on to the data of the week – particularly considering the impact it should have on the AUD the Q118 CPI read.

Fact and Figures

Expectations for the Q1 Consumer Price Index (CPI) figures (all consensus figures from Bloomberg)

Headline CPI: March quarter consensus: 0.5% quarter-on-quarter (qoq) and 2% year-on-year (yoy) previous readings, December quarter: +0.6% qoq, +1.9% yoy both pieces missed the December consensus

The RBA’s Trimmed mean: March quarter consensus: 0.5% qoq and 1.8% yoy previous quarter 0.4% qoq, 1.8% yoy again both missed consensus

The RBA’s Weighted median: March quarter consensus: 0.5% qoq and 1.9% yoy previous quarter 0.4% qoq, 2.0% yoy quarter figure missed consensus by 10 basis points (bps) yearly figure beat by 10bps.

Keys to the release:

On the headline CPI: Oil prices in the first quarter increased as did food fuel was a large drive of inflation in the December quarter and is likely to do it again.

Housing the key to the core figures – major contributor to core inflation over the past three the slowdown in the Sydney and Melbourne housing markets and falling clearance rates are likely to have taken points out of the trimmed mean and weighted mean figures.

What the currency will be watch is whether rents have re-accelerate as they did at the back half of 2017 pick up the slack left by housing – push pull here.

Items such as clothing and furnishings et. al. may also see an increase over the quarter having seen the AUD decline steadily since January 1. This should have put a natural pricing inflator in the ‘tradeables’ part of the release.

The caveat for tradeables is that disposable income has be steadily declining in the first quarter of the year.

What the RBA will see

The RBA has been consistently suggesting inflation is beginning to materialise. However, this mainly due to volatile aspects in the headline inflation read such as fuel, food and tobacco. Excluding volatile items the inflation trend is much more benign.

The blue band illustrates the RBA’s target range for core inflation, all three metrics for core inflation haven’t crossed into the target band since the Q315, and Trimmed mean and weight mean have flat lined now since for the past three quarters and are showing no signs of gapping up the remaining 20bps to hit the bottom end of the band.

Any urgency the RBA has to hike rates remains constrained by its core mandate not being meet – the AUD is under no pressure from the RBA due to inflation.

Further conformation on Tuesday that CPI in Australia remains sub-trend is a further confirmation that rates are likely to remain on hold for 2018 and even into 2019. However, what would be interesting is a poor print and if the market start to add pressure on the RBA to loosen policy, an interesting scenario.

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