Tonight we get a raft of quarterly CPI data from Australia. Given the data’s importance for the RBA, and that we haven’t had a look at inflation for a while, we could see some stronger market moves in AUD pairs following the release.
It’s a busy week for Aussie data but, this is likely the most important event of the week. And, depending on what we see, this could change the math on when the RBA might make its next move.
The Different CPIs
Unlike other countries, Australia publishes its consumer price index once every three months, making it a bigger event. There are three measures, and they all have their reason for being important.
The first is the consumer price index as it’s commonly understood. Then we have the two special CPIs: Weighted Median and Trimmed which are designed for the RBA’s policymaking. It is these that are seen as the measures for achieving the bank’s targets.
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All the data comes out at the same time at 03:30 CET (or the day before at 21:30 EST). The markets will be focusing on the quarter over quarter figures since they have more immediate relevance. However, it’s the annualized numbers that guide policy.
Q1 CPI is expected to have increased by 0.4%, which would be a slight slowing of the pace from 0.5% prior. On an annualized basis, that would put it at 2.0%, an uptick from the 1.8% registered prior. This would the inflation rate at the bottom of the RBA’s target range of 2-3%. But, since this measure includes some more volatile components, it’s not the one that is likely to determine RBA policy.
Weighted median CPI is expected to also increase at 0.4%, remaining flat compared to the prior quarter. On an annualized basis, that implies inflation was at 1.7%, and that is below the RBA’s target, although it’s at the same rate as the prior quarter.
The RBA Trimmed Mean CPI is a little worse, though on a quarterly basis we can expect it to also come in at 0.4%, maintaining stable compared to the prior quarter. On an annualized basis, however, this implies a drop to 1.7% from 1.8%. It’s this move away from the bank’s targets that is worrying analysts.
The Reaction to the Data
Recently, the RBA changed its stance to a more dovish outlook. It replaced the expectation that the next rate hike would be to the upside with an indication that it will be able to go either way.
The longer inflation remains below target, the higher the likelihood the next rate move will be to the downside. And there is quite a lot of speculation that if this inflation data were to miss, the RBA would again change its stance. It might even hint at a rate cut in the near future!
This is the position of the ANZ banking group, which, in a note to analysts, said that fuel prices are likely to have pushed inflation down. They are expecting a core rate of just 0.3%, arguing for the scenario of a rate cut in May.
A minimal increase in the inflation rate would only be marginally helpful in putting off speculation of an RBA cut since the adjusted rates would have to increase at least three decimals on an annualized basis to bring the rate in line with targets.
Although most of the economic indicators, like the recent PMI, show that the Aussie economy remains expansive, the trend remains less positive. And it would require more than just one positive data point to change direction.