Australia CPI Outlook

Playing with fire

Australia’s Q4 CPI will be released towards end-January and the quarterly report will remain the key focus for the RBA for the time being while they “begin to consider underlying inflation measures constructed using the monthly CPI” (see here).

The Bank’s preferred quarterly trimmed mean inflation metric will continue to be compiled under the pre-October methodology, including collection frequency and seasonal adjustment of CPI expenditure components (ECs).

Importantly, for those ECs previously measured in only the first, second or third month of the quarter, the prior approach will continue to be used to estimate quarterly trimmed mean inflation (most other ECs were quarterly averages and that will continue using 3-month averages of monthly CPI data).

For example, furniture prices were previously only measured in January, April, July and October but are now measured every month in the monthly CPI. For the purposes of calculating quarterly trimmed mean inflation the ABS will use growth in furniture prices over the 3 months to the first month of each quarter. For Q4, this will be growth between July and October (which we already have).

The new monthly CPI means that we now have more information about the recent trajectory of inflation for those ECs that were previously measured only once per quarter. This now helps to nowcast quarterly trimmed mean inflation earlier in the quarter.

Previously we estimated and published quite accurate nowcasts of quarterly trimmed mean inflation only after the monthly CPI indicator was published for the second month of the quarter.

More monthly EC inflation data now means we can do this after the receiving the monthly CPI for the first month of the quarter. For example, for ECs previously measured only in the second and third months of each quarter, the advent of monthly data helps us to more accurately nowcast those ECs earlier in the quarter.