March CPI figures will set the scene for the RBA

The consumer price index (CPI) rose 1.9 per cent in the December quarter 4Q22 to a peak of 7.8 per cent year on year (y/y), which sparked a further two rate hikes from the central bank in February and March, taking the cash rate to 3.6 per cent.

However, the latest monthly CPI data for January (7.4 per cent) and February (6.8 per cent) showed inflation was easing, albeit noting monthly data does not assess all the indicators.

As the central bank has been firm on bringing down high inflation to the target 2–3 per cent range, RBA governor Philip Lowe has noted the decisive role today’s (26 April) CPI figures would play in determining the central bank’s next decision on 2 May.

The RBA also expects inflation to return to the target range by mid-2025, pushing back earlier estimates and indicating more cash rate rises are on the horizon.

Despite the general consensus inflation will continue to run hot, the major banks’ economists all expect that the annual rate of inflation has already peaked in 4Q22. 

Given the last two months of inflationary data (January and February) showed services inflation and good inflation easing, the Commonwealth Bank’s economists said an easing in demand was beginning to show.

“To be clear, there will still be some elements of strong price growth in the 1Q23 CPI basket,” CBA economist Gareth Aird said.

“But the evidence from the monthly CPI indicator, as well as from surveyed measures of price pressures from the NAB business survey and the PMIs, support our view that the annual rate of inflation will step down in the March quarter.

“We expect the headline CPI to increase by 1.3 per cent in 1Q23 (7.0 per cent)."

As such if 1Q23 underlying inflation is in line with the RBA’s forecasts “a 25 bp rate hike at the May Board meeting is more likely than not”, particularly given the labour market remains very tight, Mr Aird said.

“We see inflation returning to the target range by early 2024,” Mr Aird said.

Housing inflation expected to cool

Given monthly inflationary data showed new dwelling construction inflation had decelerated, among other indicators, NAB economist Taylor Nugent expects that headline inflation will ease to 7 per cent in the March 2023 quarter results.

Despite housing being the largest component of the CPI inflation, slower new dwelling inflation over 2023 is expected to subtract around 1.3 ppts from y/y, Mr Nugent said.

“The pace of increases has slowed sharply. We pencil in 1.4 per cent q/q in Q1 2023,” Mr Nugent said.

“Monthly price increases show ongoing moderation in January and February in detached dwelling costs and town houses, but apartments are only measured in March and are a key risk.

“Slower new dwelling inflation alone is expected to contribute 40bp less to headline than in 2Q22. Due to the influence of this large component on the distribution of increases, it also alone subtracts around 25bp from the trim.

“On the other hand accelerating rents, with no relief in sight, are seen adding up to 0.4ppt. In addition, utility prices are expected to show ongoing elevated inflation in Q1 and through the year.”

NAB’s holds a more optimistic view that the cash rate will remain at 3.6 per cent with the RBA holding the cash rate for an extended period into 2024, but noted there is significant risk the RBA may move higher in the near term.

However, while Westpac agrees that the March quarter inflation will increase 1.4 per cent, taking the annual pace down 0.8 ppt to 7 per cent, it remains of the view that, another high annual inflation quarter will warrant one further 25-bp hike in May to 3.85 per cent.

Thereafter, the cash rate will be left on hold until early 2024 to quell lingering risks, economist Bill Evans said.

Meanwhile, ANZ has called a bigger fall in inflation to 6.9 per cent, expecting another rate pause in May.

“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.

[Related: Big four predicts sharp fall in inflation]