Q2 CPI preview

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From Westpac comes the following Q2 CPI preview (released today):

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  • Our Q2 headline CPI forecast is 0.6%qtr/3.2%yr. Core inflation, as measured by the average of the trimmed mean and weighted median, is forecast to rise by 0.7%qtr/2.8%yr.
  • We estimate that the 6 month annualised pace of core inflation eased back to 2.5%yr in Q2 from 2.8%yr in Q1 and 3.0%yr in 2013Q4. The pulse of core inflation has eased back from the top of the RBA’s 2-3% target band and the lack of wage inflation, well anchored low inflation expectations and a robust AUD suggests that the most likely outcome is for this moderation to continue.
  • June is seasonally a softer quarter (pharmaceuticals, holiday travel, rates & taxes and education lower, offset to a degree by the annual health insurance premium hike) with the ABS estimating a historical net contribution of about –0.14ppts. This seasonality is helping to hold down the pace of inflation despite a robust contribution from food, housing and health costs. The seasonally adjusted CPI is forecast to rise 0.8%qtr.
  • Housing, with a weight of 22.3% in the CPI, is key to understanding headline, core and non-traded inflation. We expect a bounce in house purchase prices. Rents, however, are holding their pace at 0.8% in Q2 from 0.7% in Q1. That mix lifts housing 0.7%qtr for a 0.16ppt contribution. Ex-housing, the CPI is forecast to rise 0.5%qtr. Utilities inflation has moderated and is likely to ease further over the coming year with the removal of the carbon tax.
  • The most direct impact from the stronger AUD (up 4.1%qtr against the USD, 3.7% in TWI terms) in Q1 is seen in lower petrol prices. While very volatile week to week, surveys suggest the quarterly average pump price fell 1.4%qtr.
  • Wholesale fruit prices rose in the quarter (7.0%) offset somewhat by a fall in vegetable prices (–3.0%) but meat prices have been rising helping to boost food inflation.
  • Alcohol and tobacco are expected to make a steady contribution in Q2, but less so than following the tobacco excise boost in Q1.
  • Clothing & footwear has a seasonal boost in Q1 as prices are reset post the New Year sales and prior to June 30 sales. But with a more robust AUD, and disappointing retail sales reports, we have gone for a below seasonal par rise of 1.8%.
  • Domestic holidays have a seasonal correction in Q2, confirmed by airfares data, and international holidays also tend to be softer in this quarter.
  • Traded goods are forecast to rise 0.5%qtr/2.9%yr while non-traded goods are forecast to rise 0.7%qtr/3.4%yr.

Full report here.

About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.