IN AUSTRALIA we only get inflation data quarterly, so the number is keenly anticipated.
For the inflation hawks Wednesday didn’t disappoint. For the RBA it looks like a decade of over-estimating inflation has now moved to a new decade of under-estimating.
The headline inflation number was on forecast at 0.8% for the quarter and 3% annually. However it was the underlying number that shows a more concerning picture.
Underlying inflation strips out the top and bottom 15% of moves, usually including fuel and food. Here the number was 0.7% for the quarter. This is the highest since 2014.
While that is only 2.1% annually, markets will usually annualise the latest quarter to get a more current read.
Of course 0.7% means 2.8% — above the RBA target.
Looking under the hood a number of factors were at play.
Fuel prices were up 7%. We knew that already but they have gone up further in October.
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New dwelling purchase prices, or building costs, are losing the dampening effect of Homebuilder subsidies. These costs had risen around 5% over the last year but until now this was offset by the subsidy.
Property rates were also up 3%. Household items, usually flat or down, were up 3 to 4%. Maybe its transitory but time will tell.
The RBA next meets on Melbourne Cup day. What could have been a “nothing to see here” pre-race statement will be keenly watched.
Three days later the Statement on Monetary Policy comes out which will provide their updated forecasts.
No doubt the RBA will play down the impact of one number but inflation is already above their forecast for 2022.
Some upgrades will be required. The confidence in their “no rate rise till 2024” outlook will either be toned down or removed. It will be a step too far for now for 2022 to be in play for rate rises but surely 2023 should be.
In terms of their current policy actions there will be no changes for now. However Quantitative Easing is reviewed in February, before which we will have the Q4 CPI print.
Also, whether they keep the April 2024 bond at Yield Curve Control at 0.1% is debateable. They can change that any time and given they actually have to put their money where their mouth is with that policy, it may be reviewed sooner.
Overall we continue to hold inflation bonds in portfolios where we can and will continue to do so until the market prices in 2.5% inflation.
After these numbers that day is getting closer.
Tim Hext is a portfolio manager and head of government bond strategies for Pendal’s 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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