Our early pick for Q4 CPI is for a strong headline print of 1.0%qoq, leaving headline CPI at 1.9%yoy. We expect core CPI to remain soft however, at 0.4%qoq to be up 1.5% in year-ended terms. (We will refine our estimate once the full suite of price indicators becomes available in mid-January.)
The table at right details our forecasts. Broadly speaking, there are three main drivers of our relatively strong headline call for Q4. First, the 12.5% increase in tobacco excise from 1 September, which we estimate will lift the average retail tobacco price across Q4 by around 7.5%qoq compared to the average price that prevailed across Q3. Second, we estimate retail petrol prices have risen by about 6.6% in the quarter, following a fall of 2.9%qoq in Q3. Finally, early indications are that fruit and vegetable prices have actually increased a little further in the December quarter after a strong rise in Q3 (i.e. we are not yet seeing any mean reversion). The ABS noted in Q3 that fruit and vegetable prices had been impacted by significant flooding across major growing areas. We are not surprised then that prices have shown some resilience into Q4, given that it will likely take more than a quarter for more normal supply conditions to resume.
Elsewhere, while usual seasonal strength seen in ‘domestic holiday travel and accommodation’ in Q4 is the key driver of the 1.6%qoq rise in the ‘recreation and culture’ group, we expect generally weak price pressures in other CPI groups. In particular, we expect ‘rents’ inflation in the housing group to remain soft, with the recent strength in dwelling construction especially in the eastern states continuing to weigh on yields. Media reports also suggest strong price competition in grocery (outside of fruit and vegetables) and some retail products.
The RBA’s November SMP forecasts for headline inflation point to year-ended inflation at 1.5% in Q4, which is weaker than our expected 1.9% rise. Much of the difference here, however, can be accounted for by the strength we anticipate in the (volatile) fuel, fruit and vegetable expenditure items. The Melbourne Institute’s inflation gauge for December will be released on January 16, but the gains across October and November point to a rise of about 0.6%qoq so far in the quarter. Our forecast for underlying inflation in the quarter is broadly in line with the RBA’s forecasts as outlined in the November SMP.
If the CPI prints as we expect, we see few immediate implications for the RBA, especially since our pick for underlying inflation is broadly in line with the Bank’s November SMP forecasts. The real point of difference for us – and the key factor that underpins our call for another rate cut in Q2-17 – is our expectation that the acceleration in underlying inflation the Bank is expecting (based on the midpoint of its forecast range) over the first half of next year fails to materialize.
Quite right. And gets worse in H2. Any spike is a good time to buy USD.