Australia set to remain an inflation outlier for now

Australian inflation data due Wednesday expected to show the country remains a global outlier.

The RBA looks set to stare down financial markets. Picture: NCA NewsWire/Joel Carrett

As central bankers in many major economies puzzle over the forceful re-emergence of inflation and what to do about it, the Reserve Bank of Australia looks pretty chill by comparison.

Australian inflation data for the third quarter due on Wednesday is expected to show that the country remains a global outlier, with economists widely expecting a benign report on consumer ­prices.

Still, there are some jitters after recent data in nearby New Zealand shocked with its strength, forcing financial markets to price in imminent interest-rate increases by the Reserve Bank of New Zealand.

The correlation between Australia and New Zealand on consumer price trends has often been explored by economists. It is at best a flimsy relationship given the economies are driven by different forces.

Still, there’s trepidation in markets ahead of the data given the backdrop of rising inflation pressures globally – fanned by soaring energy costs.

Economists expect the core trimmed mean measure of consumer prices in Australia to rise by 0.5 per cent on quarter and 1.8 per cent on year. That’s not nearly enough to get the RBA scrambling for a rewrite of its forward guidance on interest rates, which for now predicts no change in the ­official cash rate before 2024.

But even if the third-quarter ­inflation data is soft, money market traders will continue to apply a blowtorch to the RBA’s underbelly in an attempt to get it to recant its dovish views and recognise growing international pressures.

Already, money-market traders have been driving up yields in anticipation of inevitable spillover of price pressures to the economy. Money markets are pricing in interest-rate increases in mid-2022, ignoring advice from the RBA to mark time until 2024.

The RBA certainly won’t raise the white flag on its guidance until there is actually an inflation problem present in the official data. For the moment there isn’t, and RBA governor Philip Lowe has chided markets for the overly hawkish bets that are being placed.

Australia’s inflation data is ­anchored by low wage growth, which has been week for a decade, and there is little reason to think that will change over the medium term. There’s a lot of under-utilised labour in the job market, due in part to the pandemic, and it can take years for large workplace wage agreements to be renegotiated.

The closure of international borders might create skills short­ages in some areas of the economy, but so far it hasn’t fuelled wider price increases.

The RBA says it wants to see wages growing at 3 per cent on year – well above the current rate – and the inflation rate to spend a few quarters consolidating within the target band before raising ­interest rates.

So the financial markets and the RBA look set to stare each other down for some time yet.

“The market often disagrees with the RBA,” said David Plank, head of Australian economics at ANZ. “So the RBA will just push back with its forecasts and continue to comment that market pricing is too aggressive.

“The RBA will stick with its view about inflation and wages until the data tells it otherwise. Even a high CPI on Wednesday may not matter too much.”

Nevertheless, National Australia Bank economist Tapas Strickland said the RBA may need to shift direction sooner than it thinks, as inflation internationally looks to be less transitory and increasingly baked in. That’s something that is being increasingly acknowledged by officials at the US Federal Reserve.

“There is a probability the RBA is wrong on transitory inflation, and also global monetary policy in the past has been linked in some way,” Mr Strickland said.

Dow Jones newswires

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