Big 4 bank predicts ‘sharp fall’ in inflation

Headline inflation is expected to have fallen sharply in the first quarter of 2023, according to new predictions from ANZ, ahead of the upcoming consumer price index (CPI) data release.

From a peak of 7.8 per cent year on year (y/y) in Q4 2022, the bank has predicted that the Q1 2023 CPI data due out on 26 April will show that headline inflation dropped to 6.9 per cent y/y.

This comes after monthly figures in February 2023 showed inflation had fallen to 6.8 per cent. 

“The RBA will likely take comfort that headline inflation appears to be falling faster than it forecast in February (6.7 per cent y/y for Q2). We therefore expect the RBA to keep the cash rate on hold at 3.6 per cent in May,” said ANZ senior economist Catherine Birch.

“We think, however, trimmed mean, non-tradables, and services inflation will prove sticky, with all three measures forecast to annualise at or above 6 per cent in Q1, reflecting excess demand in the domestic economy. Given the risk of inflation expectations shifting, this is a concern.”

ANZ has increased its forecast for trimmed mean CPI inflation in Q1 2023 to 1.5 per cent quarter on quarter (q/q), up from its previous forecast of 1.4 per cent q/q.

This would still be the lowest level since Q4 2021, but Ms Birch noted that it would mean the annual rate would come in only marginally lower than the previous quarter at 6.8 per cent y/y.

According to the bank’s predictions, non-tradables and services inflation will remain elevated at around 1.5–1.6 per cent, while annual services inflation is expected to continue to accelerate.

Additionally, sharper slowdowns have been forecast by ANZ for both tradables inflation (0.6 per cent q/q) and goods inflation (1.1 per cent q/q).

Earlier this month, ANZ predicted that the RBA will keep interest rates on hold until August, when it believes the central bank will deliver one last hike of 25 bps.

The bank had previously predicted that the RBA would deliver increases of 25 bps in both April and May to reach a terminal cash rate of 4.1 per cent.

“We think persistent stickiness in the Q2 CPI report (due in late July) will prompt a final 25 bp hike from the RBA in August, taking the cash rate to a peak of 3.85 per cent. Risks remain tilted towards a higher terminal rate in our view,” Ms Birch said.

ANZ also predicted that the next monthly CPI indicator, also due out on 26 April, will show annual inflation fell to 6.5 per cent y/y in March, from a peak of 8.4 per cent y/y in December.

[Related: Rate pause expectations strengthen as inflation falls]