CPI is out Wednesday and several of the major banks have put out previews today. It is no surpise that all are calling for a weak reading. It’s what I expecrt as well.
CBA uses a novel approach of gauging the relativities of spending patterns within their own credit card data to predict a 0.45 Q4 headline CPI, but the economics team predict weaker still at 0.2%. NAB and Westpac are the same at 0.2%.
I agree we’re in for a weak report but one wonders why these models, which are now aligned so closely on the downside, failed last year to predict the sudden slump in prices in the September quarter. Sometimes discretion is the better part of modeling it seems.
Here is Westpac:
The December PPI was close to market expectations rising 0.3%qtr vs. median forecast of 0.4%qtr. The main upside surprise for Westpac (our forecast was –0.6%qtr) was the core measures ex construction (both import & domestic) rising more than we expected. But for the CPI, the modest fall in final consumer PPI, softer than expect dwelling construction prices and falling food prices all suggest downside risk to Q4 forecasts.
The final stage PPI rose 0.3%qtr resulting in a small jump in annual rate to 2.9%yr from 2.7% in Q3. Upstream price pressure remain very modest and despite the inflationary pressure from a weaker AUD and rising commodity prices, the final stage PPI has now held under for 3%yr for two quarters now.
The upside surprise to our forecast came via core PPI both imported and domestic. Our estimate of the domestic core PPI (ex construction & utilities) rose 1.1%qtr and the core import PPI rose 2.4%qtr. The annual pace of domestic core inflation continues to hang around 2.5%yr which suggest the domestic inflationary pressures, while significantly less than the 2006 to 2008 period, they are (for now) greater than they were in 2009.
Thus with the headline rise in the PPI being very close to market expectations, you might be tempted to not make much of the PPI in terms of risks to the CPI. But there are some components we take from the PPI as a guide to components in the CPI that suggest the risks to our Q4 CPI forecasts lie to the downside.
The first is the 0.1%qtr fall in the consumer goods/services PPI. While this is a very small fall it is worth noting that this is the first quarterly fall in the Consumer PPI since Q4 2009. The second is the more modest than expected rise in the PPI dwelling construction prices of 0.1%qtr. This has a good relationship with the new dwelling purchase series in the CPI and points to downside risks to our 0.5%qtr forecast for Q4. The third is the utilities series in the PPI which also has a tight relationship with utilities in the CPI. The 0.3%qtr in PPI utilities is also a touch softer than our 0.5%qtr forecast for CPI utilities. And finally, food PPI fell 2.5% in Q4 suggesting downside risk to our food ex restaurants and take-away forecast of –1.2%qtr in the CPI.
In the end these change are marginal with our forecasts only just rounding down a 0.1%ppt so we have left our Q4 CPI forecast at 0.2%qtr/3.3%yr and the average of the core measures at 0.6%qtr/2.5%yr. But today’s PPI release has left us more confident that an upside surprise to our forecast is unlikely and that a downside surprise is more likely.
CBA and NAB below.
