UNTIL next year we remain stuck with quarterly Consumer Price Index numbers, meaning they carry huge importance.
(The ABS is planning a monthly CPI indicator — but for now the quarterly data is more important than ever.)
Wednesday’s June quarter CPI numbers landed almost on expectation, bucking the recent global trend of upside surprises.
That doesn’t mean the number wasn’t high — rather it was already factored in, even generating relief that it wasn’t worse.
Headline CPI for Q2 was 1.8%, meaning 6.1% annual.
Underlying inflation (the average rate after trimming away the highest and lowest 15%) was 1.5% or 4.9% annual.
Under the hood there was decent dispersion.
Food prices were up 1.45% — but given the stories and input prices this was a low result. We expected above 2%.
Commodity prices have eased in the past month so the worst of food price inflation — perhaps some vegetables excepted — may not eventuate for now.
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Housing inflation remains buoyant (2.5% q/q) due to the cost of building new homes. Rents remain benign despite mounting signs they are moving higher.
A rare sighting of inflation in clothing and footwear (up 3.5% q/q) and furnishings (up 2.5% q/q) plays into the theme of higher goods prices.
We expect goods price inflation to be peaking, but service inflation to pick up in the year ahead.
Services remain contained for now. Health and education costs tend to be seasonal but overall are running closer to 3% than 6% annually.
Labour costs are moving higher. Skilled migration is picking up but it won’t be enough to stop cost-push inflation.
The move lower in goods prices may lead to some short-term easing of concerns overall, but we remain wary of current market pricing.
Expected inflation levels are back below 2.5% beyond 2023.
Inflation bonds are cheap and investors should consider picking them up around these levels as insurance for a decade of higher inflation.
The monetary policy implications of this CPI number are not large.
The RBA will be happy its current path and pace back to neutral cash rates this year (2.5% to 3%) seems about right.
The market is still expecting more (3.25% to 3.5%) than the RBA thinks it will have to deliver this year, so there is the chance for a small rally in rates.
The bigger story for long bonds remains the US path to potential recession.
We get a Fed rates update and US GDP number shortly, so on we move.
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.
Pendal is an independent, global investment management business focused on delivering superior investment returns for our clients through active management.
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