Australia: Inflation set to rise further - AmpGFX

As we head into Q3, and the likelihood that the market will be woken up to a strengthening Australian economy, the inflation data are also set to print higher, according to Greg Gibbs, Analyst at Amplifying Global FX Capital. 

Key Quotes

“The RBA sees some of these increases as temporary and has a subdued outlook for inflation over its forecast horizon.  However, the market may shift its outlook when faced with stronger economic growth, lower unemployment, and higher Q3 inflation.”

“Inflation in the second half may get a boost from a sizable bump to the minimum wage that came into effect on 1 July.  The minimum wage rose 3.3% on 1 July, a one-off increase that will hit the quarterly data, compared to a record low 1.9%y/y rise in the overall Wage Price Index (0.5%q/q) in Q1.”

“The RBA estimated that the direct impact on the WPI of the minimum wage increase in Q3 will be 0.5%, larger than the average direct contribution of 0.3% since 2010.  The RBA also expect the rise in the minimum wage to flow onto other wages adding a further 0.25 to 0.5% to the WPI growth.  This might be in addition to the underlying growth rate.  As such, the WPI index is likely to appear to have bottomed in the first half of this year.”

“Secondly, the RBA noted that, “The announcement of price increases by a number of electricity and gas providers points to a significant pick-up in utilities inflation in both the September quarter 2017 and the March quarter 2018. Along with the direct effects on household utility bills, there will also be indirect effects on inflation as a result of rising business input costs.”

“The rise in utility bills is relatively unique to Australia and reflects a jump in wholesale electricity prices this year on shortages related to under-investment in baseload power supplies blamed on inconsistent government policy on greenhouse gas targets, and some older coal plants closed in the last year.  As such, this could be a prolonged issue for electricity prices.”

“Whether inflation takes off in the next two years remains to be seen, but sequentially the market is likely to see inflation continuing to rise this year, after bottoming last year, reaching the RBA’s 2 to 3% inflation target.”

“Evidence of faster economic growth and rising inflation may place pressure on the RBA to reassess its rates policy later in the year.”

“Recall the estimates of neutral rates by the RBA (3.5%) that they have told us to ignore? The market is still right to wonder at what point the RBA begins to normalise policy. Certainly, this starts well before policy targets are achieved.”