Inflation on a Bumpy Path: Unraveling Australia's Price Trends

Inflation is falling, just not in a straight line

Australia introduced a monthly inflation series early this year, though many analysts still seem mistrustful of the data and even the RBA still tends to refer to the quarterly figures when talking about inflation.

Like the US, Australian inflation ticked up slightly in April, and almost exclusively because the year-on-year comparison was an unfavourable one. Changes in the CPI index on a monthly basis were little different from previous months. This uptick was as predictable as it was irrelevant. Inflation will fall more rapidly in the coming months as it is unlikely that we will see the large monthly increases that characterised global prices in the aftermath of the Russian invasion of Ukraine.

 

 

The three-month annualised rate of inflation is a little over 4%, which equates to an average monthly increase of between 0.3% and 0.4%. Last year’s CPI index rose at a faster rate than this. So even if there is no further reduction in the current trend increases in prices, we should see inflation falling by just under one percentage point over the coming three months. That would take headline inflation down to about 5.8-5.9%.

Progress after this could be a little more pedestrian for a while. But absent a repeat of the weather/energy supply shocks of last year, inflation should decelerate forcefully again at the end of 2023 and could slow around a further 1.5pp. This should happen even without assuming any further deceleration in the current trend increase in monthly prices and would take inflation down to the mid-4% level, from which a further decline towards the top end of the RBA’s 2-3% inflation target would be in sight.

 

Real and nominal cash rates (%)

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