UBS: Q3 inflation to hit record low

Via the excellent George Theranou at UBS:

Based on our proprietary survey, our Q3 headline CPI forecast is unrevised at 0.4% q/q, slowing from Q2’s bounce to 0.6% (driven by petrol). This is partly due to retracement of fuel (-2.3%, -0.07%pts); while the UBS Evidence Lab Grocery Tracker has food up 0.7%. The y/y should hold at 1.6%, under the RBA’s 2-3% target in 18 of 20 quarters, & also tracking a tick below their 1.7% forecast for end-2019. Indeed, since 2014, inflation has undershot the RBA’s 2.5% mid-point by >500bps, & a return to the ‘path’ would require CPI to ~double its recent trend & rise by 3¼% y/y for the next ~decade.

Globally, inflation remains relatively modest. Domestically, despite ongoing strong jobs, unemployment trended up, diverging further from NAIRU; while stalling wages remain far too low for a sustainable rise in inflation. An upside risk is the fall in the AUD, but weak nominal retail sales still suggests limited pass through. Indeed, business selling prices retraced, & a range of inflation expectations slid to near a ~record low.

We also reiterate our trimmed mean forecast at just 0.4% q/q, unchanged from 0.4% in Q2. Indeed, the y/y ticks down to an equal record low of 1.5% (after 1.6%) – partly dragged by a drop in (seasonally adjusted) electricity prices, amid regulatory change. This marks a record long 15 quarters below the RBA’s 2-3% target (& 21 quarters below the mid-point), & again a tick below the RBA’s 1.6% forecast. Indeed, after a per-capita recession since Q3-18, a disappointing consumer recovery means the RBA’s November SOMP will revise down their bullish 3%+ GDP profile.

More cuts and QE coming.

David Llewellyn-Smith
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