Services Focus Of Q2 CPI, Annual Rate Unlikely To Ease

Economists expect headline and trimmed mean Q2 CPI on Wednesday to moderate to around the RBA’s forecasts but this is unlikely to be enough on its own to stop the central bank hiking rates at its August 1 meeting (see MNI Q2 Inflation Forecast To Moderate To Around RBA Forecast). Developments in the domestically-driven services and non-tradeables components are likely to be the key to that decision.

• The quarterly CPI release includes the important services/goods and non-tradeables/tradeables breakdowns. Services inflation is on the RBA’s watch list given it has been sticky in other countries, is domestically driven and continued rising in Q1. A marked moderation in both quarterly and annual growth in Q2 services inflation would likely be needed to derail another RBA hike at the August 1 meeting.
• Q2 2022 services CPI rose only 0.6% q/q compared with 1.7% q/q in Q1 2023. It seems unlikely, that it will rise only 0.6% in Q2 which is required to keep the annual rate steady at 6.1%, given that the June Judo Bank services PMI release reported that charge inflation rose at its highest in four months. A 1% q/q rise would bring the annual rate up to 6.5%. Thus it is likely that it rose further in Q2.
• NZ Q2 services inflation was steady at 6.1% y/y, also implying that Australia’s is unlikely to moderate given that the correlation between the two is over 80%.

Source: MNI - Market News/Refinitiv