Finally, signs of good news on inflation

Mike Taylor

Managing Editor and Publisher

29 June 2023

A clear downward trend in inflation is emerging, according to analysis from HSBC Global Research following release of the Australian consumer price index (CPI) indicator.

The analysis said the CPI indicator had come in lower than expected at 5.6% year on year in May in circumstances where HSBC itself had predicted 6% and the broader market had predicted 6.1%, but it emphasised that core inflation still remained too high.

“Today’s figures on inflation were generally good news for Australia,” the analysis said.

“After surprising to the upside last month, the CPI indicator surprised to the downside in May. No doubt, some part of this reflects inherent volatility in this new, and somewhat experimental measure, which, of course, also makes it harder to forecast.”

“Nonetheless, a clear downward trend in inflation is emerging. The monthly CPI indicator peaked at a y-o-y rate of 8.4% in December 2022 and is now running at 5.6%. Comparing three month intervals, the 3-month annualised rate has fallen from 11.1% in December 2022, to 3.7% in May.”

“Of course, some part of this reflects volatile items and the retracement of fuel prices. Although the measures of core inflation also appear to have peaked, they are still well above the RBA’s 2-3% target band.”

“The monthly trimmed mean measure has fallen from a peak rate of 7.2% y-o-y in December to 6.1% y-o-y in May. The ABS also published a measure of CPI excluding volatile items and holiday travel, which has fallen from a peak of 7.3% y-o-y in December 2022 to 6.4% y-o-y in May.”

“Although headline inflation is coming down, and underlying inflation is also falling, the pulse of inflation is still too high. Another way to think about this is that the easier part of the disinflation process, that is, the parts largely related to pandemic and commodity market disruptions, are now coming through in the numbers, but the ‘stickier’ parts of inflation are still yet to fade.”

“In short, it’s too early to declare victory in the inflation fight, but the end is looking nearer.”

The analysis said that for the Reserve Bank of Australia, the figures will be seen as positive.

“As the minutes from the June meeting reported, the choice to hike at that meeting was a ‘finely balanced’ one. If the backdrop is seen in a similar light next week, today’s figures should push the balance in favour of pausing (which is our central case),” it said.