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.

Houses and Holes

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 fouding 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.

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