The Week Ahead With Stephen Koukoulas

By Stephen Koukoulas | More Articles by Stephen Koukoulas

All pumped up about inflation!

The March quarter consumer price index is released next week and it is all but certain to confirm yet another quarter where the RBA has missed its inflation target. The general market view is for the CPI to rise 0.5 per cent for an annual increase of 1.9 per cent. The annual increase in underlying inflation is also forecast to rise by 1.9 per cent. Recall, the RBA has a target for inflation of 2 to 3 per cent.

In a series of recent speeches, RBA officials have indicated that the inflation target has been subsumed, at least temporarily, by concerns about financial stability risks, growth in household debt and house prices. This is why the RBA has not eased monetary policy even though the miss on inflation would normally demand lower interest rates. The recent labour force data only reinforce this view.

Ahead of the CPI, the futures market is pricing in about a 40 per cent chance on a 25 basis point interest rate cut by December and does not have a full 25 basis point cut priced in until the middle of 2019. A shock result for the March quarter CPI on top of the recent shock in the labour market may change that.

Source: IFM Investors