Tomorrow is the December quarter CPI number and below find a preview courtesy of Westpac:
Our Q4 headline CPI forecast is 0.6%qtr/2.6%yr. Core inflation, as measured by the average of the trimmed mean and weighted median, is forecast to rise by 0.7%qtr/2.4%yr in Q4. Note that the Q3 headline CPI printed1.2%qtr, 2.2%yr, versus our top of the market 1.0%qtr forecast. Further, the ABS estimates that seasonality in Q4 is a 0.1ppt drag on the CPI i.e. the headline should come in lower than the seasonally adjusted estimate.
We estimate that the 6 month annualised pace of core inflation will lift from 2.4%yr to 2.7%yr. That is still comfortably within the RBA band and thus inflation is not high on the list of concerns for monetary policy.
The main upside surprises a quarter ago were on housing and recreation, with only a partial offset from a downside surprise on food. In Q4, we anticipate a larger than usual seasonal rise in fruit and a normal seasonal rise in domestic holidays. Vegetables are forecast to have an unseasonal rise – they normally decline in Q4. When they occur, such instances tend to have an out-sized impact on inflation. Together, fruit and veg explain almost half of the projected increase in the headline CPI. Offsetting these upward forces are the usual Q4 declines in pharma, medical services, childrens’ footwear, accessories, tableware and international holidays. The average petrol price for Q4 was 2% lower than the Q3 average. This will contribute –0.07ppts to the CPI.
Housing remains key to both the core and non-tradable measures of inflation. Housing inflation is forecast to ease
back to 0.5%qtr from 2.0%qtr in Q3, which was boosted by the usual seasonal bump in utilities and rates & taxes.
To date, the only area where we are seeing any meaningful inflationary impact from the weaker AUD is via higher petrol prices. The inflation outlook remains quite benign.
Inflationary expectations remain contained and aggregate slack is rising, suggesting downside risks to our fundamentals based medium term inflation profile.
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.
