Carbon price to battle petrol in CPI

From UBS today comes a useful preview of next week’s CPI:

This week we highlight UBS’s Q3 CPI survey, ahead of official data on 23 October. With Q3 being a seasonally high quarter, and petrol prices up almost 7% (largely due to a lower AUD), our survey shows headline CPI rising 0.9% q/q, its fastest in a year (& its fastest in two years, ex carbon). Nonetheless, the y/y pace eases to 1.9% from 2.5%, its slowest since mid 2012, pre the introduction of the carbon tax.

For the more important underlying CPI (which adjusts for seasonality & volatility), we find the RBA’s statistical core average increased 0.5% q/q (similar across the trimmed mean & weighted median) – the sameas the past few quarters. With the carbon tax-inflated 0.8% gain from Q312 ‘dropping out’, the core average eases to 2.1% y/y in Q313 from 2.4% in Q2 (albeit only marginally below our ex-carbon estimate for Q213). Including CPI (ex vol), ‘underlying’ inflation in Q3 (0.6% & 2.1% y/y) is likely to be ‘in line’ with the RBA’s forecast of 2¼% y/y by end 2013.

Of note, the current worryingly high (4.3% y/y) pace of non-tradable inflation should drop to 3.5% in Q313, as Q312’s carbon tax introduction ‘drops-out’, easing concerns over domestic inflation pressures. This is only partly offset by a renewed rise in tradable (or imported) inflation (now -0.7% y/y), which should edge up to -0.4% y/y (ahead of further rises over the coming year as the lagged impact of a lower AUD is passed through). On balance, the macro backdrop suggests slight downside risk to the official inflation print – with weak domestic demand in 1H13, business surveys showing weak price trends, slower wages growth, & lower global inflation. However, the recently improving trends in business & consumer confidence, domestic housing, and the global data (US politics aside) still likely sees the RBA on hold for now, absent core CPI with a 1-handle y/y (0.3% q/q).