Australia CPI and RBA Outlook (with Doug Krer)

The RBA left rates at 4.35% but inflation is still too high, partly due to the Iran war energy shock.

Doug Krer

James McIntyre

The RBA hiked three times due to energy shock on top of existing strength. They are on hold but talking tough to anchor inflation expectations.

Underlying inflation is more concerning than headline.

Doug Krer

James McIntyre

Headline inflation fell to 4% in May (from 4.2%) due to fuel excise tax cuts. But trim mean (underlying) is sticky at 3.3-3.4%, above the RBA's 2-3% band. The RBA will keep a hawkish stance.

The RBA focuses on quarterly CPI; the Q2 print will be key.

Market expectations for further tightening have pulled back.

Doug Krer

James McIntyre

Market pricing for hikes has dialed back due to the Strait of Hormuz reopening and weaker domestic data (labor market surprise on the downside). Further labor weakness would create tension for the RBA's dual mandate.

How are wages holding up?

Doug Krer

James McIntyre

Private sector wages are okay. The 4.75% minimum wage increase (to protect low-wage workers from past inflation) adds to cost pressures and could spill over to other workers, making inflation stickier.

Labor market weakness helps cap wage proliferation risk.

How is household spending holding up?

Doug Krer

James McIntyre

Household spending dipped 1% month-on-month in April but is up ~5% year-on-year in nominal terms. Negative wealth effects from falling house prices in Sydney and Melbourne are a growing headwind. The RBA is watching for a downward spiral into recession.

Mining states (WA, QLD) still see house price gains, but the two largest economies are weakening.

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