Monthly CPIs Suggest That Australia Won’t Follow NZ’s Moderation

There is a high correlation between Australian and NZ CPI inflation over both 3- and 5-year periods. With Australia’s Q2 CPI not printing until July 31, there is some information in the NZ data – that Australia should see a moderation in quarterly non-tradeables growth. However, NZ’s Q2 headline printed lower than expected and moderated to 3.3% y/y from 4%, whereas Australia’s monthly CPI data for April/May are pointing to a pickup in annual headline and underlying inflation.

• The RBA forecast in May that Q2 CPI would pickup to 3.8% from 3.6% in Q1. While Governor Bullock has warned about extrapolating from the monthly averages, they have been within 0.1pp in both Q1 and Q4. The April/May headline average is in line with the RBA at 3.8% y/y, which would require a 1% q/q rise, the same as Q1. However, the annual correlation with NZ is 90% signaling that there may be some downside risk.

Australia vs NZ CPI y/y%

Source: MNI - Market News/Refinitiv

• The April/May average of the trimmed mean is at 4.25%, well above the RBA’s 3.8% projection. This means that Q2 could print at least at 1% q/q. The RBNZ’s measure of underlying inflation moderated to 3.6% in Q2 from 4.2% which is materially below Australia’s Q2 average.
• NZ non-tradeables inflation was slightly stronger than expected at 0.9% q/q and 5.4% y/y but still lower than Q1’s 1.6% and 5.8%. The Q2 average of Australia’s non-tradeables inflation is 5.1%, below NZ’s but the gap is narrowing. The annual rate suggests that Australia’s quarterly rise will be lower than Q1’s, a trend that was seen in NZ too. The correlation between the annual rates stands around 90%.