NAB Business Survey Points To Further Underlying Price Pressures

The latest NAB business survey’s narrative re: inflation is being touted by some as generating “chatter” re: the potential for a May rate hike from the RBA. The summary passage on inflation noted that “cost growth escalated further in the month, with labour cost growth hitting 2.7% in quarterly terms and purchase cost growth up to 4.2% – both tracking at considerably higher rates than at any other point in the history of the survey. However, firms seem to have been able to pass on at least some cost pressure with prices also rising at their fastest rate in the history of the survey at 2.3%. The escalation in price growth included prices in retail sector, which rose 3.7% in quarterly terms, likely supporting margins and helping to explain the very strong increase in the profitability index for the sector. The continued escalation in price growth over recent months suggests a strong Q1 CPI reading is likely when released later in the month and based on the monthly trend could well continue to build in Q2.”

• We would point to comments from IFM’s chief economist as the “chatter” on this occasion. He tweeted the following in the wake of the release: “Forward indicators suggest that inflation in Q1 is going to be unambiguously very strong. It should be more than enough to trigger the #RBA to respond and it should do so irrespective of the election - both sides of politics should support rather than politicize its action.”
• Meanwhile, pricing re: tightening at the May’s RBA meeting was unmoved, with a non-negligible chance of a 15bp rate hike observed given that ~7bp of tightening is priced at present (based on current effective cash rate levels). Note that the implied cash rate over that horizon (~13bp) is still some way shy of the 18-19bp that has been seen in recent weeks.
• Sell-side consensus still looks for a 15bp rate hike at the Bank’s June meeting when the Bank will have been provided with the Q122 CPI (27 April) & WPI (18 May) readings. The Bank’s reference to observing data in the coming “months” indicated a preference to observe both of these readings before moving on the cash rate. That would suggest that although a move in May cannot be totally ruled out, such a scenario isn’t the Bank’s preference at present. The May SoMP meeting will likely be used as a staging post to signal that tightening is imminent, backed up by the Bank’s latest economic forecasts.