Disinflation is good news but inflation still too high

Oksana Patron

31 July 2023

Although the inflation is coming down, it is still too high, with figures still above the 2-3% target band for both headline CPI and core inflation in annual and quarterly terms, according to HSBC chief economist in Australia and New Zealand, Paul Bloxham.

On top of that, a tight jobs market combined with above-target inflation will support the case that more monetary tightening may be needed.

“The second quarter CPI figures were good news for the RBA. The economy is clearly dis-inflating, as many of the pandemic-related supply-side disruptions fade and the monetary tightening that has already been delivered weakens demand,” Bloxham said.

The RBA’s core measure of inflation fell to 5.9% year-on-year in Q2, which was slightly below the RBA’s forecast from its May statement.

“Looking solely at the Q2 print (to abstract from base effects) the trimmed mean ran in the quarter at an annualised rate of 3.6%, down from its peak annualised rate of 7.6% in Q3 2022, which we consider to be an impressive degree of disinflation,” HSBC chief economist said.

Bloxham stressed that the monetary tightening which has already been delivered is clearly slowing growth, particularly in consumer spending, and, delivering significant dis-inflation. Additionally, the full effect of the previous monetary tightening is yet to feed through to the economy.

According to him these arguments could see the RBA choose to be patient and judge that, although inflation is still too high and the unemployment rate is still too low, the monetary tightening already delivered will be enough to sufficiently ease inflation and loosen the jobs market in coming months.

“On balance, we see the RBA as near the end of its hiking phase, but likely to deliver one more hike, which we expect in August,” he concluded.