Aussie Monthly CPI Preview

A lot has to go right to avoid a rate hike

Australia’s May CPI will be released next Wednesday, 26 June.

This release has significant importance for the RBA Board - which discussed a rate hike this week - as it can be used in conjunction with the April CPI to nowcast a very good estimate of the Q2 CPI, including on an underlying basis.

We did just that for the Q4 and Q1 CPI releases and comfortably beat consensus with our trimmed mean inflation nowcasts (see those previews here and here).

We expect year-ended headline inflation in May to have been +3.8% y/y, up a little from +3.6% y/y in April.

• In monthly terms, we expect the CPI to have fallen by 0.25% m/m, which is likely to translate to a flat outcome, or slight rise, in seasonally adjusted terms.

• Seasonal weakness in holiday travel & accommodation prices and an estimated ~4% m/m fall in petrol prices are expected to have subtracted ~0.5ppts from monthly headline inflation.

Underlying inflation is the key focus

The RBA will be focusing on underlying inflation measures and the mid-month of the quarter detail - particularly for several services categories - that can be used to shore up Q2 CPI nowcasts.

Combining our bottom-up nowcasts for the May CPI and preliminary estimates for June reveals exactly why the RBA Board now has a hiking bias.

A lot needs to go right (or wrong on the labour market very soon) to avoid further monetary policy tightening.