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Free AccessREPEAT: MNI: CPI Challenges RBA Progress In Goals Narrative
Repeats Story Initially Transmitted at 06:17 GMT Jul 31/02:17 EST Jul 31
--RBA Cash Rate Hike Could Be Delayed By Sluggish Inflation Ahead
By Sophia Rodrigues
SYDNEY (MNI) - Australia's recently-released second quarter inflation
contained a few details that could challenge the Reserve Bank's narrative for
further progress in returning inflation to target, raising the risk that the
cash rate would be on hold for longer than previously thought.
Money markets are currently pricing in a near 50% chance of a 25bps hike in
the RBA cash rate by August 2019, but 'inflation progress' makes even that look
overpriced.
In any other situation, market pricing for a rate cut would be the right
bet but Governor Philip Lowe has clearly stated he would tolerate low inflation
provided the labor market is improving. Given the outlook jobs outlook remains
buoyant, the RBA is unlikely to consider a rate cut on the back of any subdued
inflation outlook, with an extended period of the cash rate at 1.5% is a more
plausible scenario.
Data published last week showed headline CPI inflation rose 0.4% q/q in Q2,
falling short of economists' expectations for the seventh straight quarter.
Inflation y/y, however, crept into the RBA's target band for the first time in
five quarters and only the second time in 15 quarters, with a 2.1% rise.
Underlying CPI rose 1.9%, in line with expectation, although slowing from
an upwardly revised 2.0% rise in Q1.
There were several soft themes in the inflation data and while the RBA
acknowledges them, they are of the view that they are either one-offs or
unlikely to lead to any meaningful inflation forecast change in the Statement on
Monetary Policy due on August 10.
Significantly, the RBA is relying on above-trend GDP growth to lead to
slightly faster acceleration in wage growth and for inflation to progress to the
mid-point of the target band.
Indeed the RBA forecast for inflation to slowly progress towards the target
mid-point is almost entirely dependent on the wage growth forecast.
--INFLATION OUTLOOK
However, the RBA may be a little optimistic, placing too much emphasis on
the erosion of spare capacity putting upward pressure on wage growth, and little
emphasis on past inflation outcomes being an important determinant of future
wage growth.
Although y/y CPI entered the RBA's target band, it is not expected to
accelerate further, with some economists forecasting a deceleration to 1.7% by
end-2019.
If headline CPI remains stuck around 2.0% this year and the next, it would
be difficult for wage growth to accelerate, given many enterprise agreements,
and even employers outside that, use CPI as a starting point for wage
negotiations.
Low headline CPI has other implications too, especially in the insurance
sector where premium growth is widely linked to inflation.
One example is inflation across the health sector, up 3.4% y/y in Q2 -- the
slowest pace of increase since 2001. A dampening factor was a slowing in annual
health insurance premiums, up 3.95% in 2018, the lowest rate of increase in 17
years.
There is a wider implication of this. As premium revenue grows at a slower
pace, insurance companies are likely to respond with cost-cutting measures, and
slower wage increases, which, in turn, will impact the future inflation outlook.
--WATCH UTILITIES
The Q2 data also showed other headwinds to the inflation outlook. Rent
inflation, for example, was flat q/q compared with a 0.2% rise in Q1, marking
the first such outcome in 24 years. Economists expect rental inflation to remain
weak but offsetting this would be rising cost for dwelling construction. The RBA
is also relying on this to put upward pressure on housing inflation.
To some, the game-changer for the inflation outlook is the fall in
household energy prices, with electricity prices down 1.3% q/q in Q2 and gas
prices falling 2.2%. Until recently, rising electricity prices were expected to
remain a meaningful inflationary pulse, at least through 2018, and possibly into
2019 now some see prices falling this year and first half of next.
--MNI Sydney Bureau; tel: +61 2-9716-5467; email: sophia.rodrigues@marketnews.com
To read the full story
Sign up now for free trial access to this content.
Please enter your details below.
Why MNI
MNI is the leading provider
of intelligence and analysis on the Global Fixed Income, Foreign Exchange and Energy markets. We use an innovative combination of real-time analysis, deep fundamental research and journalism to provide unique and actionable insights for traders and investors. Our "All signal, no noise" approach drives an intelligence service that is succinct and timely, which is highly regarded by our time constrained client base.Our Head Office is in London with offices in Chicago, Washington and Beijing, as well as an on the ground presence in other major financial centres across the world.