Inflation now walking briskly, but not yet running. RBA first move not till June but more likely to be 0.4%

The Consumer Price Index (CPI) results show annual headline inflation has risen to 5.1 percent – up by 2.1 percent in the March quarter 2022 – meaning inflation has gone from a “creep” to a brisk “walk”, although is still yet to hit the “running” levels of inflation that countries like the US and the UK are edging towards.

Underlying inflation is now 3.7 percent, well above the top of the RBA target band and the highest it’s been since March 2009.

The fundamental issue now is how the RBA is going to interpret these results in the context of adjusting the cash rate. KPMG remains of the view the central bank will hold off raising rates until after the election but given the sustained and broad-based increases in prices the first cash rate movement upwards could well be 0.4 percent.

The key drivers of inflation during the quarter were transport (up by 13.7 percent over the year), housing (up by 6.7 percent over the year), and household furnishings (up by 4.9 percent over the year).

With the 22c per litre temporary reduction in petrol excise, the impact of global oil prices on domestic iPreview (opens in a new window)nflation is likely to fall in the next 2 quarters. This is important given the price of automotive fuels has risen 35.1 percent over the past 12 months and contributed 18 percent of the overall increase in inflation for the March quarter 2022.

Considering the underlying drivers of inflation going forward, we are still going to a mix of excess-demand and supply-limited inflation for some time. However, wage-cost is about to become an important element as wages growth starts to pick up.

Excess-demand inflation is being largely driven by the continued consequence of the extraordinary increase in money supply that has entered the global economy from Quantitative Easing responses in many Western economies, including Australia.

Supply-limited inflation – driven by disruptions to commodity and goods production – will continue as a result of factors like the Russia-Ukraine conflict and now the re-emergence of the coronavirus pandemic in China and its zero COVID policy that will see (an increasing) disruption to goods production and port operations.

The question remains whether oil prices will retreat due to market forces over the coming 6 months so that the price shock that will occur when excise rates return to previous levels is at least somewhat muted – compared to if oil was still trading at US$130/bbl. The latest forecasts by the IEA suggest global oil demand will soften to 99.4mb/d for this year, while global supply is increasing to 99.1 mb/d led by non-OPEC+ countries.

While around 3 mb/d of oil from Russia is likely to be withdrawn from global supply from May, the daily production increases from non-OPEC+ and the US, plus large releases in oil reserves, should mean supply and demand remain relatively in balance and oil prices should not shoot substantially higher in the short term, driving domestic inflation even higher. This is borne out in the futures market where the November futures price for oil was last trading at around US$95/bbl, a slight decline from today’s spot price of US$98/bbl.

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One thought on “Inflation now walking briskly, but not yet running. RBA first move not till June but more likely to be 0.4%

  1. Market has been trading below (~6bps) the target rate (10bps) for a while now so will be interesting to see if RBA adjusts Exchange Settlement rate accordingly or tighten up

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