Yep, this is a sleeper for the central bank--the risk that the next CPI print at the end of July will be ugly. And unlike 2008, it will not have forecasts of a big rise in unemployment and a deceleration in economic activity to rely on. Here is what UBS's economists had to say:
* This week we take a look at UBS’s Q2 CPI survey, ahead of the official data on July 28th. While there’s always issues of precision when trying to replicate the ABS’s vastly more substantive quarterly price sampling, our price survey makes one thing quite clear – despite all the top-down evidence suggesting otherwise, it seems very unlikely that Q2 CPI is going to be a particularly low print.
* According to our survey, headline inflation could print as high as 1.0% in Q2, lifting the y/y pace from 2.9% to 3.4% (back above the 2-3% target band). More importantly, our assessment of the range of ‘core’ measures point to underlying inflation in Q2 being about 0.8% q/q, leaving the y/y pace unchanged at 3.0%.
* Of course, it’s always possible to find a way to argue the CPI result is being distorted higher. The tobacco hike and (flawed) financial services charge are likely to add 0.5%pts alone to the CPI, while petrol and fruit & veggie prices are up as well. But even the ‘statistical’ core measures show elevated gains for Q2.
* But we can’t keep abstracting from the things that go up each quarter. And we also seem to have passed the trough on upstream price pressures & wages growth. So if our forecast is correct, the RBA will once again be faced by an unsatisfactorily high quarterly CPI print when they sit down at their August meeting.
* It seems, therefore, that current market pricing for a rate cut is unlikely to be satisfied (absent a significant destabilising global event), and the market is inadequately pricing the risk of a rate hike in August.
