AUSTRALIA: CPI May Follow NZ Soft Goods/Robust Services Pattern

Australia’s Q3 CPI prints Wednesday and sometimes information can be found in the NZ data released two weeks earlier. However, the 3-year rolling correlations for core, services and non-tradeables have been trending down over the year and Australia’s headline will be impacted by temporary factors. In contrast, the RBA remains “vigilant to upside risks to inflation”, whereas the RBNZ has cut rates 75bp since August and said inflation is “converging” on the mid-point. 

• There is a 70% 3-year correlation between NZ and Australian underlying inflation down from 95% in H1 2022. NZ’s moderated to 3.4% from 3.6%, significantly less than the 1.1pp drop in annual headline inflation. Australia’s trimmed mean is forecast to moderate to 3.5% from 3.9% in Q3, which would still be higher than NZ’s.
• The RBA is focussed on the domestically-driven services component. The 3-year correlation dropped to 60% in Q2 but NZ services inflation posted a strong quarterly rise of 1.5% in Q3 due to rents and council rates, even though the annual rate moderated 0.8pp to 4.5%. Thus, there is a chance that Australian services inflation remains elevated in Q3. Another 1% q/q rise would keep the annual rate steady at around 4.5%, anything higher would see it rise.
• The moderation in NZ Q3 inflation was predominantly driven by tradeables prices which fell 0.2% q/q and 1.6% y/y. However, non-tradeables picked up to 1.3% q/q from 0.9%. The 3-year correlation with Australia is around 90% and 75% respectively, and so soft tradeables and robust non-tradeables prices could be repeated in Australia. NZ core non-tradeables only saw a slight improvement to 4.8% y/y from 4.9%. 

Australia vs NZ CPI services y/y%