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Following the stronger-than-expected Consumer Price Index (CPI) inflation data for the start of the year, ANZ Research still expects the Reserve Bank of Australia (RBA) will start to cut rates in November.
But the risks around this have skewed towards a later start, particularly given the ongoing strength in inflation for non-tradables (goods and services that face little foreign competition) and services.
"Non-tradables and services inflation will likely need to slow materially from the second quarter for rate cuts to begin at the November meeting.”
Non-tradables include rent, hairdressing, restaurant meals, domestic holidays, medical services, education, child care and insurance. Tradables include most foods, clothing, furniture, electronics like televisions and computers, sports equipment and petrol.
We think the cash rate will need to remain at a restrictive level for some time yet for the gap between demand and supply to continue to close.
Our forecasts have annual headline inflation ending 2024 a touch above the RBA’s two to three per cent target band, before falling into the band in 2025.
Administered prices, which are at least partly regulated/provided by the public sector, are adding to inflation; large seasonal rises in education and health were the biggest contributors to the year’s first-quarter headline inflation.
But tightness in the housing market and elevated labour cost growth are two key factors that may contribute to ongoing stickiness in non-tradables and services inflation.
In housing, historically low rental vacancy rates are unlikely to rise materially any time soon, keeping rent price growth elevated. The slowdown in housing construction cost inflation has stalled due to several factors, including competition with the massive infrastructure pipeline.
The inertia in Australia’s wage growth cycle, particularly from enterprise bargaining agreements, will likely continue to slow disinflation, unless productivity growth can accelerate.
Recent headline disinflation has been largely driven by tradables deflation, despite higher oil prices and shipping costs.
Expected Australian dollar appreciation and softer retail price signals should keep a lid on consumer durables prices, but tradables deflation won’t last forever. Oil prices and shipping costs will likely cause ongoing price volatility rather than sustained upward pressure.
Holiday travel and accommodation prices appear to be normalising and are lower than this time last year.
We think the RBA will want to see a couple of consecutive quarters of lower non-tradables and services inflation to be convinced overall inflation will not only return to the two to three per cent target band but remain there.
As such, non-tradables and services inflation will likely need to slow materially from the second quarter for rate cuts to begin at the November meeting (which comes after the third quarter CPI data), barring a more significant deterioration in labour market and/or activity data in the meantime.
To read more, visit the full Inflation Chart Pack here.
Catherine Birch is Senior Economist at ANZ Research
The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.
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