Australia’s CPI likely to rise 1.6% y/y in Q4 2015

Australia's headline CPI for Q4 2015 is expected to rise 1.6% y/y and 0.3% q/q in Q4 2015. Holiday travel, house purchases and tobacco have contributed largely for the fourth quarter, while drop in fuel prices have offset the overall rise, cutting 0.2ppts from the headline inflation. The effect of declining fuel prices is lesser than what it might have been. There has been a divergence for a certain period of time between the AUD price of crude oil and the nation's automotive fuel prices. This is partially because of a widening of spread for gasoline of Singapore. However, there is a much broader spread between the AUD price of Singapore gasoline and the pump prices of Australia.

"Core inflation is forecast to increase by 0.6%qtr, which will see annual core CPI hold around the bottom of the RBA's inflation target band", says Westpac.

Australia's six month annualised inflation is likely to be at a slower pace of 1¾% y/y. Any upwards price pressure from the weaker AUD is being offset by declining fuel prices resulting in a renewed drop in traded prices. Currently, the disinflationary trend continues to remain for traded goods and services. Prices of vegetables, traded goods and services and fuel and tobacco are expected to decline by one-third in Q4. The decelerating inflation and declining fuel price are mainly depressing the CPI.

"While we doubt we will see the commencement of a significant disinflationary impulse, we do recognise downside risk to our core inflation forecasts", says Westpac.