UBS with the note:
Q2 CPI forecast revised up: to lift 0.9% q/q & 4.0% y/y, highest since the GFC
We sharply revise up our Q2 CPI forecast. Headline is now expected to lift by 0.9% q/q, above our long-held preliminary forecast of 0.6%, and further above the available consensus of ~0.3% (albeit ‘stale’ & likely higher now), and the RBA’s implied ~½%, even after Governor Lowe’s raised their forecast from the May SOMP which had only ~0.2%. This would differ from Q1 which was surprisingly well below consensus, but ~in-line with the RBA’s forecast. We also expect the y/y to spike to 4.0% (mkt: ~3.4%, RBA ~3½%) – as the record fall in Q2-20 drops out – the fastest pace since leading into the GFC peaked at 5.0% in Q3-08. This would be up very sharply from 1.1% in Q1.
Detailed item level forecasts show a lot of uncertain measurement impacts
Our detailed item-level CPI forecast has a lot of uncertain ‘measurement’ impacts. 1) While industry data suggests a sharp rise in advertised rents, the CPI measure of the stock of rents (7% share of the CPI) – is ~flat, & likely to remain slow for now (UBSe 0.4%). 2) Similarly, while the HomeBuilder subsidy ended in Q1, the CPI price impact is when construction commences, so new dwelling purchase of owner occupiers (9% share) will likely remain moderate (+2%, albeit uncertain), despite faster ‘underlying’ price rises. 3) Several Government/administered prices, particularly utilities (5% share), have ongoing freezes. That said, electricity prices (>6%) should jump, as the WA subsidy ends and its price level ~doubles. 4) The end of excise tax hikes on tobacco (3½% share) is a new disinflationary impulse. 5) UBS Evidence Lab data indicates food price (17% share) moderated to ~flat q/q (after 0.4%). 6) On the upside, the surge in oil prices will lift automotive fuel (3% share) prices sharply (7½%, ¼%pt).
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Trimmed mean revised up to 0.5% & 1.6% y/y; but only bit > RBA’s 1½% y/y
For the RBA’s preferred measure of ‘underlying’ inflation – the trimmed mean CPI – we also raise our forecast to 0.5% q/q (was 0.4%), the fastest since Q1-18, and the equal highest since 2015. However, this would follow a significant downside surprise in Q1 of 0.3%, one of the lowest on record. The y/y rebounds to 1.6%, but is still only a bit above the RBA’s forecast of 1½%, albeit up sharply from a record low of 1.1% in Q1. Nonetheless, this would still mark a record long 22 quarters below the bottom of the RBA’s 2-3% CPI target band, and 28 quarters below the target mid-point of 2½%.
Macro indicators & global suggest upside to CPI; but RBA unlikely to react yet
Overall, domestic macro indicators and global outcomes still suggest upside pressure on inflation. Domestically, the record pace of labour market tightening, with unemployment dropping to 4.9%, the lowest since the GFC, saw a spike in business surveys of selling prices to a ~record high. Similarly, recent upside surprises of CPI in major economies, including NZ is very large (albeit used car prices are not in the CPI). Given this, we revised up our inflation outlook, with Q3 headline CPI lifted to 0.6% q/q and 3.0% y/y; which raises CY-21 to 2.7% y/y (was 2.4%). We also now expect the trimmed mean is more likely to be sticky around ~½% q/q, and hence should be near ~2% y/y in 1H-22, earlier than previously expected (was Q4-22). At face value, if the current lockdown is short-lived, and the economy rebounds quickly again, seeing inflation pressure build, this would likely see the RBA abandon the yield target in 2H-22 and allow them to hike rates in 2023. But, for now, given the extended lockdown in Australia, there is an increasing risk that Q3 GDP is negative ( UBSe ~flat). Indeed, the outlook is now so uncertain that if the RBA takes a ‘least regrets approach’ it’s unlikely to quickly react to one higher-than-expected CPI with a material hawkish shift. Overall, we see lockdowns as delaying the ‘progress’ the RBA’s framework sees as required to taper, which raises a material …