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Goldman: Headline CPI To Accelerate To 8% Y/Y In H222

AUSTRALIA

Goldman Sachs note that “several events have boosted the outlook for inflation in Australia over recent weeks, including a surge in domestic energy & food prices and the Fair Work Commission’s decision to mandate a large increase in minimum wages from 1 July.”

  • “At the headline level, we now expect inflation to peak at 8.1% Y/Y in Q322, with higher food, fuel and utility prices contributing +2.7ppt to the rise. Utilities inflation is likely to remain high for the next two years or so, but an easing in food, fuel and new dwelling inflation should see headline CPI inflation ease to 3.1% Y/Y by end 2023 and 2.2% Y/Y by end 2024.”
  • “Importantly, the high rate of headline inflation over the next 6-12 months is likely to lead to an even larger increase in minimum wages next year, which will lead to persistently higher inflation across a range of services items. This is likely to keep measures of ‘underlying’ inflation above the RBA’s 2-3% target until early 2024.”
  • “From a policy perspective, we continue to expect the RBA to hike to a terminal rate of 3.10% by end 2022 - around 50bp above our estimate of ‘neutral’ - to prevent an overshoot of inflation beyond 2024. That said, we are mindful of risks around the inflation outlook, including upside risks from pro-cyclical fiscal policy or a ‘de-anchoring’ of inflation expectations, and downside risks from a cooling housing market.”
  • “On balance, we view the risks to our rates forecast as skewed to the upside over the next 12 months or so, including a ~35% chance that the RBA accelerates the monthly pace of tightening to +75bp over the coming quarter (rather than +50bps). We also see upside risks to our terminal rate forecast of 3.10%, although we are mindful that the RBA may seek to lower rates back to neutral settings in 2024 or 2025 as inflation eases.”
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Goldman Sachs note that “several events have boosted the outlook for inflation in Australia over recent weeks, including a surge in domestic energy & food prices and the Fair Work Commission’s decision to mandate a large increase in minimum wages from 1 July.”

  • “At the headline level, we now expect inflation to peak at 8.1% Y/Y in Q322, with higher food, fuel and utility prices contributing +2.7ppt to the rise. Utilities inflation is likely to remain high for the next two years or so, but an easing in food, fuel and new dwelling inflation should see headline CPI inflation ease to 3.1% Y/Y by end 2023 and 2.2% Y/Y by end 2024.”
  • “Importantly, the high rate of headline inflation over the next 6-12 months is likely to lead to an even larger increase in minimum wages next year, which will lead to persistently higher inflation across a range of services items. This is likely to keep measures of ‘underlying’ inflation above the RBA’s 2-3% target until early 2024.”
  • “From a policy perspective, we continue to expect the RBA to hike to a terminal rate of 3.10% by end 2022 - around 50bp above our estimate of ‘neutral’ - to prevent an overshoot of inflation beyond 2024. That said, we are mindful of risks around the inflation outlook, including upside risks from pro-cyclical fiscal policy or a ‘de-anchoring’ of inflation expectations, and downside risks from a cooling housing market.”
  • “On balance, we view the risks to our rates forecast as skewed to the upside over the next 12 months or so, including a ~35% chance that the RBA accelerates the monthly pace of tightening to +75bp over the coming quarter (rather than +50bps). We also see upside risks to our terminal rate forecast of 3.10%, although we are mindful that the RBA may seek to lower rates back to neutral settings in 2024 or 2025 as inflation eases.”