Australia Q2 CPI Preview

Moderating

Australia’s Q2 CPI will be released on 30 July.

While this will be a few weeks after the next RBA Board decision on 8 July, today’s monthly CPI for May - see here for our analysis - provided important inputs to sharpen our nowcast for Q2 headline and trimmed mean CPI inflation.

Underlying inflation looks to have been moderate in Q2 but not quite as low as the RBA had assumed in the May SMP.

Nevertheless, we are sticking with our view that the RBA Board will lower the cash rate by 25bps in July. Underlying inflation has moderated and alternate survey measures of inflation have fallen further in recent months. Market goods & services inflation is below 2%. Q1 GDP growth was also softer than expected and domestic demand growth remained tepid. And the Board appears to lean dovish.

Markets are pricing more than a 90% chance of a rate cut in July. That is, a slam dunk case to cut. We aren’t quite that confident.

We have follow-up 25bp cuts pencilled in for August and, following a pause, November, taking the cash rate to 3.10% by year-end. One risk to this view is that the disinflationary impulse from the housing components of the CPI aren’t quite as disinflationary going forward. Something to keep watching.

Another solid headline inflation outcome

Our bottom-up analysis points to a +0.8% q/q and +2.2% y/y outcome for Q2 headline inflation. On a seasonally adjusted basis we expect the headline CPI to have risen +0.7% q/q.

Government-administered and tradables (ex fuel) categories are expected to have contributed significantly to Q2 headline inflation prior to seasonal adjustment.