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Q2 CPI Preview – Trimmed mean at 1.0% a test of RBA strategy

Australian inflation remains on watch. NAB expects the Q2 trimmed mean to come in at 1% q/q and 4% y/y. Uncertainty though remains with NAB’s central view the RBA will remain on hold, but further tightening as soon as August is a real possibility should the central bank reassess and conclude rates are insufficiently restrictive.

Taylor Nugent | Markets Research

We expect Q2 trimmed mean of 1.0% q/q and 4.0% y/y. That’s two tenths above the RBA’s May SoMP forecast of 0.8% and a tenth above our 0.9% preliminary expectation ahead of the May CPI indicator.

We also pencil in a headline outcome of 1.0% q/q nsa (1.1% sa). That would see headline lift to 3.8% y/y. A surge in international travel prices is the key driver.

Relative to last quarter, durable goods are more benign but still running ahead of the trend declines prior to the pandemic. A reacceleration in grocery inflation is a key support for the trimmed mean. Housing components remains persistently strong, but elsewhere market services show some improvement.

The aggregates matter, but this isn’t a simple ‘sticky service prices’ story. A silver lining is that the strength we expect to be confirmed in Q2 CPI is despite progress in still too high market services and non-tradable inflation.

Uncertainty remains despite the information in the Monthly indicators. New cars, much of health, and financial services have had no coverage so far. Over the past 2 years, trimmed mean has printed on average a tenth away from our forecast and two tenths away from the Bloomberg median, and with little directional bias. With the RBA’s strategy having left risks thoroughly unbalanced, Q2 CPI is particularly important.

NAB’s central view is that the RBA will remain on hold – some cooling in market services inflation, wages growth likely passed its peak, and soft activity growth should be enough to keep the low bar of a return to target in 2026 in sight. The consequence is they won’t be able to cut for a long time. We pencil in May 2025.

Still, further tightening as soon as August is a real possibility should the RBA reassess and conclude rates are insufficiently restrictive. At numerous points through this tightening cycle the RBA has slowed or paused hikes earlier than has been warranted by the data backdrop, opting to tolerate upside risks and higher for longer inflation in pursuit of maintaining labour market gains. Their confidence in that approach is frayed.

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