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Australia Q3 CPI and a Return to Growth?

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Australian covid cases might have finally reached a peak. Particularly with the 7-day moving average of cases finally trending downwards for the first time since the “third wave” started.

This could mean that there is a chance of relaxing covid restrictions by Christmas as some authorities have suggested. However, it’s too soon to tell at this point. And the drop in cases numbers might simply be temporary.

In that context, we get the report of Australia’s Q3 inflation figures. Throughout the last three months, Australia has had increasingly harsh restrictions on movement, effectuating some of the strictest requirements in the world.

There is, therefore, quite a bit of speculation on how much that impacted the country’s economic growth. The last time major restrictions were implemented only across two states and had a substantial impact on the country’s growth.

What could move the markets

The third quarter in Australia is typically the low point of sales, as the country is in the middle of winter.

Usually, inflation is lower. However, given the cost of implementing covid measures, prices are reportedly rising as consumers shift their shopping patterns away from closed establishments.

Covid compliance also increases the cost of transportation. As a result, many analysts are expecting an acceleration in prices even as overall retail sales are under pressure.

Australia publishes three inflation measures at the same time – one headline, and two “core” figures. Typically the RBA focuses on the two core measures.

However, given the unique situation due to covid, it’s less likely that inflation will be a major concern for the Reserve Bank. That doesn’t mean the market won’t respond to the intrinsic value of the Aussie dollar, and expectations for the RBA to take action once the covid crisis is over.

Higher inflation would pull forward any outlook of a rate hike in the medium turn, and increase bond yields along the curve. In general, that could be positive for the Aussie dollar. And it could get a boost after trending higher through most of the month.

What to look out for

Analysts anticipate that Headline inflation will remain steady at a quarterly growth rate of 0.8%.

However, on an annual level, the expectation is to slow down to 3.1% from 3.8% in the prior measure. That’s above the RBA’s target but this is generally due to volatile measures, so it’s not likely to be as market-moving.

The measures that the RBA cares about are:

  • Trimmed Mean CPI, which excludes the more volatile elements, such as food and fuel. This could show a quarterly change of 0.5%, unchanged from the prior quarter. But on an annual basis, it may accelerate to 1.8% from 1.6% prior. That’s just two decimals away from the Reserve Bank’s target.
  • Weighted Mean CPI, which considers seasonal fluctuations. This figure could also remain flat on a quarterly basis at 0.5%. Additionally, there is a projection for it to accelerate on a yearly basis to 1.9% from 1.7% at the last reading.

The RBA has been notably quiet ahead of their regular meeting next week. At their last meeting, they dismissed concerns about rising inflation.

If we see a beat of expectations, we can expect markets to start adjusting to expectations that we’ll get some comments on inflation from the reserve bank.

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