Most (but not all) of the brand-name economic forecasters expect core inflation to be very benign today. While the consensus estimate is a low 0.6%--in the bottom half of the RBA's 2-3% band--many respected analysts think it will come in lower. Deutsche Bank are looking for an ultra-low 0.3% core print, Citigroup and Moody's are both punting on 0.4%, and groups like Macquarie, CBA and RBS are at 0.5%. The surprise would be a genuinely high outcome (eg, 0.7% or more). While it is a lower probability contingency, a high core number combined with positive revisions to the Q1 2012 and 2011 estimates could throw-up a year-on-year result of around 2.5%. This is way above what the RBA is currently forecasting. Indeed, it would cast further questions over the spate of recent rate cuts. Yesterday the Governor said they were looking for year-on-year core inflation to run at around 2%. While this upside surprise would result in a sell-off in bond prices (higher yields) and a rally in the Aussie dollar, with some of the priced rate cuts washing out, traders know that nobody really has an appetite to short Aussie bonds in today's highly uncertain global environment. So any sell-off could be short-lived. A downside surprise will help bond prices rally, and yields decline, but would not be a genuine shock unless it printed at 0.3% or less. The RBA does not feel it needs to cut rates again in August (having already front-end loaded so many insurance cuts), and would need a negative inflation shock combined with further offshore turmoil to do so.
