Australia CPI Preview: Inflation set to remain above target as hopes of early interest-rate cuts fade
- The Australian Monthly Consumer Price Index is foreseen steady at 3.4% YoY in March.
- Quarterly CPI inflation is expected to have ticked higher in the first quarter of the year.
- The Reserve Bank of Australia is confident the economy would dodge a hard landing.
- The Australian Dollar is correcting higher, but is still under bears’ control.
An Australian inflation update takes the spotlight this week ahead of critical United States (US) macroeconomic data. The Australian Bureau of Statistics (ABS) will release two different inflation gauges on Wednesday. The ABS will release the quarterly Consumer Price Index (CPI) for the first quarter of 2024 and the March Monthly CPI, an annual figure that compares price pressures over the previous twelve months. Also, the quarterly report includes the Trimmed Mean Consumer Price Index, the Reserve Bank of Australia's (RBA) favorite inflation gauge.
The RBA met on March 18-19 and decided to keep the Cash Rate steady at 4.35%. In the accompanying statement, the Board scrapped references to possible rate hikes, triggering an Australian Dollar (AUD) sell-off. The central bank will meet again on May 6-7, and CPI figures will definitely guide such a decision.
What to expect from Australia’s inflation rate numbers?
The ABS is expected to report that the Monthly CPI rose by 3.4% in the year to March, matching the previous annual figure reported in February. The quarterly CPI is foreseen rising 0.8% QoQ and up 3.4% YoY in the three months to March. Finally, the RBA Trimmed Mean CPI, the central bank’s preferred gauge, is expected to rise by 3.8% YoY in March against the previous reading of 4.2%.
Market players built confidence in easing price pressures but have learned the lesson: rate cuts are not a priority for policymakers. Moreover, considering authorities from most major economies, Australia included, believe they can dodge a hard landing. However, officials involved in setting the monetary policy are more worried about trimming interest rates too early than about the impact of tight monetary conditions on the economy. An exception to this rule could be the Eurozone and the European Central Bank (ECB), but that’s a story for another moment.
Back to Australian inflation, the anticipated figures would support the RBA’s decision to hold rates and slowly pave the way for a shift in monetary policy. In the Statement on Monetary Policy released after the March meeting, policymakers stated: “Inflation is falling but is still high. It is important to bring inflation down because high inflation hurts all Australians. The Board’s interest rate decision supports the gradual return of inflation to the midpoint of our 2–3 per cent target range.”
Additionally, inflation is expected to decline to 3.2% in 2024 and continue dropping towards 2.6% by mid-2026, finally reaching the central bank’s target band of 2% to 3%. Policymakers also anticipate wage growth will peak at 4.1% in mid-2024 before gradually declining to 3.2% in June 2026. Finally, economic growth is foreseen to fall from 1.5% to 1.3% in June 2024 before gradually improving towards 2.3% by the end of 2025.
How could the Consumer Price Index report affect AUD/USD?
As usual, CPI readings will have a significant impact on the Australian Dollar (AUD) as the figures will guide the RBA's upcoming monetary policy meetings. The figures would be interpreted as how they could affect the Board's decisions. With that in mind, a higher-than-anticipated outcome would force the central bank to keep interest rates at current levels for longer. Market players do not expect higher rates, but policymakers may try to cool down expectations of soon-to-come rate cuts. Generally speaking, higher interest rates tend to provide support to the local currency. On the contrary, below-expected figures could boost rate-cut expectations, undermining demand for the Aussie.
From a wider perspective, easing inflationary pressures should be understood as better odds for economic progress and benefit the AUD in the long run.
Ahead of the CPI release, AUD/USD trades around 0.6450, recovering from 0.6360, the year-to-date low set this April. The US Dollar (USD) has soared on the back of risk aversion triggered by Middle East woes and decreasing odds for a US Federal Reserve’s (Fed) rate cut in June. The Greenback shed some ground at the start of the week, but its undeniable strength prevails.
Valeria Bednarik, FXStreet Chief Analyst, says: “The AUD/USD pair offers a limited bullish potential, according to technical readings in the daily chart. The latest recovery seems corrective, given that the pair is losing upward momentum well below bearish moving averages. Furthermore, technical indicators are developing below their midlines with neutral-to-bearish slopes, suggesting AUD/USD may soon resume its slide.”
Bednarik adds: “The pair is currently battling a relevant resistance area, followed by a stronger one at around the 0.6500 threshold. An advance towards the latter won’t affect the dominant bearish case but, on the contrary, provide sellers with fresh opportunities. Near-term support levels come at 0.6400 and 0.6360, while a break below the latter exposes the 0.6320 price zone.”
Inflation FAQs
Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.
The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.
Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.
Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it. Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.
Economic Indicator
Monthly Consumer Price Index (YoY)
The Monthly Consumer Price Index (CPI), released by the Australian Bureau of Statistics on a monthly basis, measures the changes in the price of a fixed basket of goods and services acquired by household consumers. The indicator was developed to provide inflation data at a higher frequency than the quarterly CPI. The YoY reading compares prices in the reference month to the same month a year earlier. A high reading is seen as bullish for the Australian Dollar (AUD), while a low reading is seen as bearish.
Read more.Next release: Wed Apr 24, 2024 01:30
Frequency: Monthly
Consensus: 3.4%
Previous: 3.4%
Source: Australian Bureau of Statistics