Tim Hext: Inflation remains stubbornly high — but not as high as you may think

Despite higher-than-expected monthly data, the outlook for inflation should be mildly friendly over the next few months, says Pendal’s TIM HEXT

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IF forecasting inflation was already complicated, the move to monthly numbers last year added further complexity.

The latest monthly Consumer Price Index from the Bureau of Statistics — which compares prices in April 2023 and April 2022 — shows an annual rise of 6.8%, versus an expected 6.4%.

On the surface this should worry the Reserve Bank and markets — and increase the chance of another rate hike in June.

But under the hood, the May number looks like it will be closer to 5.5%, which means the RBA should be able to hang on till August and reassess then.

How can we tell? This is where it gets a little complicated.

The monthly inflation numbers are published as year-on-year outcomes, and you must back-solve to gain a sense of the monthly pace.

In this case, monthly was up 0.7% versus an expected 0.4%.

There is no underlying inflation data yet.

Also, for now only half of items are updated every month. (Another 10% are updated annually (council rates, health, education) and the remaining 40% are updated quarterly, spread across the three months).

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This will change in the future. The Bureau has been given extra resources and funding to introduce an accurate monthly series, similar to other countries.

Impact of subsidies

The other detail inflation forecasters need to stay on top of is the impact of subsidies, which exploded in scope and breadth with Covid and energy shocks.

CPI measures the price a consumer pays, so a subsidy will reduce that.

But a rebate does not reduce the headline price, and is not counted.

These subsidies appear and disappear regularly now and must be kept track of.

The Morrison government’s HomeBuilder scheme was the big one in 2021 and 2022, but now it’s all about utility prices.

The subsidy detail for this April number — which the ABS reminded us of — is that in April 2022 the Morrison government cut fuel excise in half as prices surged post the Ukraine invasion.

This relief was removed in October. This means that — despite falls in the price of crude oil — the price we are paying at the pump is higher than this time last year.

Beyond fuel, there were modest upside surprises across clothing, furnishings, food and holiday travel.

These would be uncomfortable for the RBA, though not likely enough to warrant another rise in June.

However, with the market pricing in only a 35 per cent chance of a hike, these are not odds we will take on.

What it means for investors

The implication for bonds is muted.

As mentioned, the outlook for inflation here and in the US should be mildly friendly over the next few months.

Beyond that time will tell. Risk markets should come under some moderate pressure, though, as it’s a reminder of the long and hard road ahead.

About Tim Hext and Pendal’s Income & Fixed Interest boutique

Tim Hext is a Pendal portfolio manager and head of government bond strategies in our Income and Fixed Interest team.

Tim has extensive experience in banking, financial markets and funding including senior positions with NSW Treasury Corporation (TCorp), Westpac Treasury, Commonwealth Bank of Australia, Deutsche Bank, Bain & Co and Swiss Bank Corporation.

Pendal’s Income and Fixed Interest boutique is one of the most experienced and well-regarded fixed income teams in Australia.

The team won Lonsec’s Active Fixed Income Fund of the Year award in 2021 and Zenith’s Australian Fixed Interest award in 2020.

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About Pendal Group

Pendal is a global investment management business focused on delivering superior investment returns for our clients through active management.

In 2023, Pendal became part of Perpetual Limited (ASX:PPT), bringing together two of Australia’s most respected active asset management brands to create a global leader in multi-boutique asset management with autonomous, world-class investment capabilities and a growing leadership position in ESG.

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