RBA risk falling below inflation target band when quarterly CPI numbers released

HIA Chief Economist Tim Reardon correctly predicted a rate hold in July. Picture: Tertius Pickard

ANALYSIS

A shock inflation number could see “egg on the faces” of the RBA board today, with the central bank facing a “real risk” of inflation landing below its preferred target band.

Today will see the release of both monthly and quarterly CPI data by the Australian Bureau of Statistics.

It’s the latter that the RBA will be focused on, because that is the preferred data set that Governor Michele Bullock informed us she was waiting for to get a better idea of the state of play for inflation.

And the annual inflation reading will be of particular interest, said SQM Research founder Louis Christopher.

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“The 30 July numbers will be all important,” Mr Christopher said. “After the last quarter, the 12 month CPI was 2.4 per cent. If these numbers come in as expected, we may be tracking down from that.”

Mr Christopher said that quarterly inflation would need to come in at 1.1 per cent for the annual number to move in the wrong direction, but suggested this was unlikely.

All eyes will be on RBA Governor Michele Bullock after the release of quarterly inflation data. Sydney. Photo: Gaye Gerard

“If you look at the accumulation of the previous three quarters, we had 0.2 per cent in the September quarter, another 0.2 per cent in December and then 0.9 per cent in the March quarter. That’s a total of 1.3 per cent,” he said. “Another 0.9 per cent in June and we’re seeing annual inflation drop to the bottom of the RBA’s target band.”

Of course, if the June number mirrored one of the first two quarters, which were before Trump tariffs and conflict in Iran, the RBA could have a new problem.

“You could have inflation around 1.5 per cent on an annual basis,” Mr Christopher said. “A read of 0.6 per cent or less will put inflation under 2 per cent.

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“If it gets below 2 per cent, they will immediately have egg on their faces and if they then don’t cut in August, someone needs to lose their job.”

SQM Research director Louis Christopher

Why is the quarterly data more important than monthly?

Every month, the ABS releases an inflation report.

The most recent one, looking at May data, showed annual inflation at 2.1 per cent.

While that seems about as “in” the RBA’s inflation target band of 2-3 per cent as you could be, that data was not seen as reliable enough for the RBA because it only considers 43 out of a possible 87 ‘expenditure classes’.

This is why the RBA decided to hold and wait for the more comprehensive quarterly figures. Buried beneath the noise of those calling for a July rate cut, a few economists were on the money.

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“Unemployment still low and the RBA will prefer to see the official quarterly CPI data at the end of July,” predicted Tim Reardon of Housing Industry Association (HIA) in Finder’s regular survey of economists.

Dr Nalini Prasad. Picture: Supplied

“I think the RBA will wait and see what happens in the next quarterly CPI before making any decisions about the path of interest rates,” said Dr Nalini Prasad of UNSW Sydney.

And ‘waiting and seeing’ is what the RBA does best. However, a large investment into ABS tech and data gathering capability means that from November this year, the monthly data will include the full complement of expenditure classes, meaning the central bank will regularly get numbers it finds more reliable and can hopefully act more decisively.

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