MNI Insight: Upside Risks To Australian Inflation, But Will It Be Enough To Shift RBA Expectations?

Executive Summary:

• Yesterday’s NZ inflation came in higher than expected across the main components driven by housing, utilities, food, and transport. Non-tradeables inflation was also its highest since the series began in 2000. Correlations between NZ and Australia CPI measures are high at the moment, across both headline and core measures. Whilst correlation doesn’t imply causation, given Australia has been experiencing similar cost pressures to NZ, the risks point to a strong Q3 Australian CPI result too, which prints next Wednesday.
• Whether or not this can shift RBA market expectations remains to be seen though. The RBA is already forecasting strong inflation outcomes into year end. Presumably next week’s result will need to be strong enough for that outlook, coupled with easing momentum forecast into the middle of next year, to be under threat.
• Current market pricing has roughly 25bps priced at each of the next three meetings, with ~145bp of cumulative tightening priced through to the end of the current cycle (based on futures). The RBNZ has been well ahead of the RBA in this tightening cycle though and current market pricing expects that to remain the case.
• Full the full piece, see here:AU and NZ CPI (Oct 19) final.pdf