VIEW: J.P.Morgan: Core CPI Impersonates Headline

J.P.Morgan note that "today's core CPI result comes at a difficult time for the RBA as the market had already been challenging the guidance, partly on the belief that inflation would hit the central bank's thresholds to hike far earlier than officials realize. We don't think the RBA will have seen enough here to shift their view, as the drivers of inflation have to be seen as sustainable. That is hard to declare from one reading with an unusual mix, registered in a lockdown. Wage growth will be key to how quickly the RBA's assessment can evolve. The sequencing probably has caught officials off guard though, as it previously seemed more likely that a recovery in wage growth would drag core inflation back into the band, whereas now we have already registered a 2.1% Y/Y result on trimmed mean, well before wages have recovered."

• "We do expect trimmed mean will drop again in sequential terms given the narrowness of today's result, though from here it is unlikely to move back down materially below 2% on annual rates. This means wage growth becomes less of a leading indicator of core inflation moving back in the ballpark of the target, and more a signal of confirmation that CPI improvement is sustainable. The importance of wage inflation to the RBA in this assessment is understandable given that it drives 70% of firms' costs."
• "From the market's perspective, today's result has poured more fuel on the front-end fire. The RBA will likely have to push back with more YCC purchases on target bonds, this probably won't be decisive for front-end pricing overall until the market gets comfort on inflation. The wage numbers on Nov 17th are the next significant signpost locally, though we suspect global inflation dynamics will also be important."