FLAU - Australia Inflation: Too High To Ignore
2023-10-28 06:00:00 ET
Summary
- Australian Consumer Price Index (CPI) surprises with higher-than-expected inflation, potentially leading to a restart of the Reserve Bank of Australia's hiking cycle.
- RBA projections for inflation may need to be revised as GDP and labor market data remain strong, putting pressure on the central bank to deliver another rate hike.
- RBA Governor Michele Bullock's remarks suggest that the central bank is considering raising the cash rate further if there is an upward revision to the inflation outlook.
By Karol Sindera
CPI in Australia remains elevated, which could cause the Reserve Bank of Australia to restart its hiking cycle next month.
The Australian Consumer Price Index delivered an upside surprise to the market on Wednesday, with both headline and trimmed-mean inflation arriving above consensus and Reserve Bank of Australia ((RBA)) forecasts. On a year-over-year basis, inflation continues to ease along with the rest of the world; but the pace of decline has been slower than expected.
In its August forecasts, the RBA was anticipating a rise of 0.9% quarter-over-quarter (QoQ) in the CPI trimmed inflation mean; however, the September QoQ figure came in 0.3% higher than that. The August projections were based on an oil price of $80 and an Australian-U.S. exchange rate of 0.66. However, there have since been a meaningful changes, with oil now closer to $90 and the exchange rate at 0.64. Further, GDP and labor market data have been very robust. Focusing solely on unemployment, the most recent rate of 3.6% is tracking below the RBA’s 4Q forecast of 3.9%. Weak productivity and increasing wages also mean higher labor costs and, potentially, higher inflation. All of this could put more pressure on the RBA to deliver an additional hike and revise its near-term inflation forecasts.
Remarks from the RBA have been on the hawkish side. In a speech earlier this week, RBA Governor Michele Bullock said that its board “will not hesitate to raise the cash rate further if there is a material upward revision to the outlook for inflation." However, during her testimony to a Senate committee yesterday, Bullock declined to confirm whether the latest data was a “material” surprise. She mentioned that the central bank is still in the process of analyzing the data and updating its inflation forecasts, but she did not provide any guidance on the near-term outlook for monetary policy.
In sum, the Australian economy remains resilient, which has meaningful policy implications. The latest CPI surprise implies that inflation is currently tracking above RBA projections with further upside risk. This means that the central bank will likely have to revise its near-term inflation forecasts, and suggests that it might restart its hiking cycle and deliver one more hike in order to return inflation to its 2 – 3% target by late 2025.
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Australia Inflation: Too High To Ignore