Based on our proprietary survey, we cut our Q1 headline CPI forecast to 0.0% q/q (was 0.2%), a sharp slowing from Q4’s 0.5%. This would be the weakest in 3 years, & lower for only 3 quarters in the last 22 years. The key drag is fuel (-9.6%, -0.28%pts), but the UBS Evidence Lab Grocery Tracker has food up 0.4%. Overall headline likely slowed to a >2-year low 1.3% y/y (after 1.8%), under the RBA’s 2-3% target in 16 of 18 quarters, but ~tracking the RBA’s implied profile behind their 1¼% forecast for Q2-19. We also cut our 2019 CPI forecast to 1.5% y/y, further below consensus at 1.8%. Since 2014, inflation has undershot the RBA’s 2.5% mid-point by a cumulative 500bps, & to return to ‘path’ would need to ~double its recent trend & rise by 3.2% y/y until 2025.
We also revise down our trimmed mean forecast to 0.4% q/q (was 0.5%), after Q4’s 0.4% (albeit our survey suggests downside risk of 0.3%). The y/y drops to 1.6% (after 1.8%), the lowest since 2016, & 2nd lowest on record. This marks 13 quarters below the RBA target, & a bit below the profile implied in their 1¾% forecast for Q2. Indeed, after a per-capita recession in 2H-18, the RBA will likely revise down GDP by 70bp-100bs, & our forecast adds to the case for an explicit easing bias in May.
And the RBA:
Implications for rates: Pay RBA May meeting and receive July in OIS At its meeting in May, the RBA is likely to have to downgrade its forecasts for GDP; which should prompt the Bank to adopt an explicit easing bias. While we continue to expect the RBA to cut the policy rate twice this year; we think that risks remain skewed towards a later move, in line with our AU economists’ call for two 25 bps of cuts in July and August. This argues for select AUD OIS flatteners, such as pay RBA May-19 meeting date OIS vs receive July-19.
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.
