Eased supply side constraints will lead CPI to fall faster, prompting the RBA to act, a former staffer tells MNI.
Quarterly CPI rose 4.1% y/y over Q4 2023 from Q3’s 5.4%, lower than the forecasted 4.3%, while trimmed mean rose 4.2% from the prior quarter’s 5.1%, data from the Australian Bureau of Statistics showed Wednesday. The RBA has forecasted CPI at 4% by the June quarter.
“The underlying story is that perhaps more of the inflation was supply driven than we previously had anticipated,” he argued. The surprisingly strong Q3 CPI had led some to believe the sharp disinflation observed in the U.S. might skip Australia, Gross said.
“But these [latest CPI] numbers show that even though unemployment is low, we're still able to maintain disinflation as supply chains normalise. That's a good thing because it means it's a story that will continue to resolve pretty quickly.”
He said the RBA will keenly focus on the trimmed mean quarterly change, which had fallen surprisingly. “In terms of the supply story, things we import, such as white goods, saw substantial moderation, alongside transport costs.”
CUT PREDICTIONS
The overnight index swaps market has priced in a full 25bp cut to the Reserve’s 4.35% cash rate by the June 17-18 meeting. This has run counter to the Reserve’s hawkish tone and the belief by many former staffers that the RBA would like to keep a firm grip on the cash rate. (See MNI: RBA Rate Cut Talk Premature - Ex Staff)
Gross said a cut by June was feasible should the data remain consistent, noting the Reserve will change its strategy should the metrics alter.
“If you look at a graph of the underlying monthly inflation you see a pretty clear de-acceleration in inflation that's gone on since July 2022 – the three-month moving average has been continuously trending downwards, despite that anomalous Q3 quarter.”
Over the past four months, using the monthly indicator, underlying inflation had fallen within the band, he noted. (See chart) The RBA may cut rates should that persist over the next three months to stay ahead of the curve, as any change to monetary policy will have a lagged effect, he said.
(Source: Isaac Gross, 2024)
He noted the RBA could bring the return of inflation back to target forward a full year to end of 2024, but doubted whether the RBA would alter its unemployment forecasts significantly, as any level below 4% was likely unsustainable.
While rental inflation had fallen somewhat, it would still present a problem for the RBA alongside services inflation, Gross added. “I'd say the rental market is still probably the primary area of concern for the RBA,” he continued.
The RBA next meets Feb 5-6.