Australian headline consumer price inflation likely to have accelerated in Q2 2018 - ANZ

Australian second quarter inflation data is set to be released around the end of this month and the data is expected to affirm that any acceleration in inflationary pressures continues to be quite gradual. According to an ANZ research report, the headline inflation and core rate are expected to rise 0.5 percent sequentially in the second quarter. Results consistent with the expectation might see the headline inflation rise to 2.3 percent year-on-year from the first quarter’s 1.9 percent year-on-year. However, the core inflation might remain stable at 1.9 percent on a year-on-year basis, stated ANZ.

Headline inflation is expected to have been driven by increased petrol prices, the annual rise in health insurance premiums and the regular tobacco indexation. Fruit and vegetable prices are likely to record a slight decline.

Benign inflationary pressures continue to indicate subdued wage growth and the effect of retail competition. While retail competition appears set to stay intense, wage growth has stabilized and there are some encouraging signs: the acceleration of the WPI plus bonus measure; the recent larger-than-expected rise in the minimum wage; and a rising number of companies recording above 3 percent wage growth and difficulty in finding suitable labor.

“We expect wage growth to gradually accelerate, lifting unit labour costs and domestic market services inflation over time”, said ANZ.

The burden on wage growth to underpin higher inflation is all the more heavy given the possibility for a slowdown in new dwelling purchase price inflation and ongoing weakness in rental inflation. The focus of policy continues to be on making enough progress toward the mid-point of the 2 percent to 3 percent inflation target band.

“We expect underlying inflation to hit 2 percent y/y in Q3 2018, but the path higher to be extremely gradual. This primarily reflects our expectation that wage growth will lift only slowly, meaning the RBA is unlikely to be confident that sufficient progress has been made on the inflation front to reduce monetary accommodation until the second half of 2019”, added ANZ.

At 19:00 GMT the FxWirePro's Hourly Strength Index of Australian Dollar was neutral at 2.1429, while the FxWirePro's Hourly Strength Index of US Dollar was bearish at -98.8487. For more details on FxWirePro's Currency Strength Index, visit http://www.fxwirepro.com/currencyindex