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Cliff Notes: Inflation Risks Linger

Key insights from the week that was.

In Australia, the Q1 CPI printed 1.0% (3.6%yr) for headline inflation and 1.0% (4.0%yr) for underlying trimmed mean inflation, meaningfully higher than consensus and likely the RBA’s view too, based on our assessment of its June 2024 forecast (3.3%yr headline, 3.6%yr trimmed mean). The latest update is consistent with an ongoing moderation in consumer inflation, aided in large part by global disinflationary forces within tradables, but the detail did reveal some upside surprises in the quarter.

Electricity prices were not as weak as anticipated (–1.7% vs. –3.4% forecast), though it is worth emphasising that the Government’s Energy Bill Relief Fund remains an effective tool in shielding households from much worse outcomes. Additionally, the increase in pharmaceutical prices (7.1% vs. 4.7% forecast) and financial/ insurance premiums (2.0% vs. 1.4% forecast) were stronger than expected, while car prices also surprisingly lifted (1.0% vs. –0.6%). The upside surprises were generally not in categories that point to strong domestic demand, however.

As detailed by Chief Economist Luci Ellis in her note mid-week, evidence of a slower-than-expected pace of disinflation during the opening quarter have coincided with a firmer set of data prints on the labour market over recent months. The balance of risks points to the RBA Board retaining a cautious perspective over the next few months, as new information on the labour market, prices and economic growth are closely scrutinised for signs of upside risk to the inflation outlook.

All-in-all, we still anticipate that there will be no change to the RBA’s policy stance in May; however, we now expect policy to remain on hold for longer, with the first rate cut now forecast to occur in November rather than September. Thereafter, and assuming no further upside surprises to inflation, the RBA will have scope to lessen the contractionary setting of monetary policy at an incremental and measured pace. We expect 25bps of rate cuts per quarter through to Q4 2025, to a terminal rate of 3.10%.

Also critical to the medium-term economic outlook will be developments around fiscal policy. For an in-depth analysis on the national fiscal outlook ahead of the Federal Budget update in May, see our latest update published earlier today on WestpacIQ.

Offshore, the focus was on the US activity data showcasing a resilient economy. GDP expanded at an annualised rate of 1.6% in Q1, and while the headline result undershot expectations, the detail suggests this is not reflective of a weak domestic economy. Personal consumption rose 2.5% with services rising 4.0% – the fastest rise in services since 2021. A sharp rise in imports, centred on services, drove the weakness in the quarter. Excluding trade, GDP came in within expectations. Strong growth was accompanied by strong prices – the PCE ex. food and energy rose 3.7%yr and implies a 0.4%mth rise in core PCE out later today. This would mark a reacceleration in PCE inflation after two months of deceleration. All together, the US economy is in a strong position with consumption supporting inflation.

Durable goods orders rose 2.6%mth in March and 0.2%mth stripping out the volatile transportation and defence categories. Together with the tepid non-residential investment data from GDP, the outlook for growth in manufacturing and investment remains clouded by high borrowing costs. Recent data will likely prompt a more hawkish tone from the FOMC to temper inflation expectations, noting that it will take time for restrictive policy to cool inflation.

Westpac Banking Corporation
Westpac Banking Corporationhttps://www.westpac.com.au/
Past performance is not a reliable indicator of future performance. The forecasts given above are predictive in character. Whilst every effort has been taken to ensure that the assumptions on which the forecasts are based are reasonable, the forecasts may be affected by incorrect assumptions or by known or unknown risks and uncertainties. The results ultimately achieved may differ substantially from these forecasts.

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