Transition to Australian Monthly CPI

RBA communication risks beckon

We have just been through a dry run of the communication challenges that may arise for the RBA during the transition to the full monthly CPI which will begin later this year, starting with the release of the October CPI.

The RBA’s focus is typically on underlying inflation, specifically the trimmed mean.

The recent episode showed that when commentators and some economists only peruse high-level monthly inflation data they can get the wrong end of the stick.

As outlined in yesterday’s RBA Board Minutes, “the sharp declines in the monthly indicators for headline and trimmed-mean inflation were likely to have overstated the easing in underlying inflation momentum”. In part this reflects that the monthly trimmed mean indicator is calculated at an annual level using data in original terms whereas the preferred quarterly measure trims quarterly seasonally adjusted CPI sub-component data.

Moreover, as we flagged a month ago in our Q2 CPI Preview, the Minutes noted that “movements in components of the monthly CPI data that contained new information suggested that underlying inflation in the June quarter could be slightly higher than the staff had forecast in May”.

It was very apparent that this point was initially missed by those that don’t dig into the detail of the monthly CPI.

Tricky transition period for the monthly CPI

The ABS has moved mountains to get a monthly CPI up and running from later this year and deserves a pat on the back. Eventually, the monthly CPI will be very useful for the RBA and RBA watchers alike.

We say eventually because for at least the initial 18 months after the monthly CPI’s introduction, we could see periods where interpretations of the CPI data could vary markedly, potentially creating communication issues for the Bank.