Oil and milk prices to spill the tea on inflation story

Petrol and dairy prices will shed light on Australia’s inflation struggle in a crucial week for domestic economic data.

Australian Bureau of Statistics figures on Wednesday are expected to show headline and underlying inflation rising in May as conflict in the Middle East continues to impact supply chains across the economy.

More importantly, it will reveal how quickly and widely the second-round effects of higher oil, gas and fertilizer prices are reflected by businesses.

One item to watch will be milk.

ANZ economists Madeline Dunk and Adam Boyton said perishable goods were the first to record price increases, with homemade milk prices rising in late April.

“We expect prices to be slightly higher than usual in some fresh food spending classes, such as milk, fruit and vegetables,” the duo said in a research note.

The Central Bank will be mindful of the fact that although oil prices have fallen to lows not seen since March, the flow effects of the energy shock could continue to push consumer prices up.

A temporary ceasefire in recent days has allowed cargo ships to begin transiting the Strait of Hormuz in greater numbers, but it will take months to make up for supply losses.

It is not yet known how long the waterway will remain open.

However, despite the complete closure of the Bosphorus, oil prices were already in a downward trend in May.

Commonwealth Bank senior economist Trent Saunders expects annual headline inflation to fall to 4.1 per cent from 4.2 per cent in April.

Fuel prices are expected to decrease by 12.3 percent during the month and monthly inflation is expected to decrease by 0.4 points.

Core measures of inflation, which exclude fuel, are expected to be stronger, with the monthly adjusted average expected to rise to 3.5 percent.

In its latest forecasts, published in May, the RBA predicted the three-month trimmed average would reach 3.8 per cent by mid-2026.

Whether this happens depends on how quickly and widely cost pressures are transferred by businesses.

“We think the demand environment may make it difficult for businesses to fully reflect the impact of higher input prices,” Mr Boyton and Ms Dunk said.

An ABS survey in May found that just 11 per cent of firms had increased prices due to higher fuel costs, with costs the most absorbing.

If there is little evidence of a second round of pass-through in the May data, this could indicate that inflation remains below the RBA’s forecast.

Mr Boyton and Ms Dunk said even if the trimmed average came in line with the RBA’s forecast, the bank would likely remain on hold in August given signs of slowing economic activity.

Following the surprise increase in the unemployment rate in April, unemployment is expected to fall to 4.4 percent on Thursday.

Westpac economists predict May household spending figures, also due on Thursday, will rise to 0.7 percent, recovering from a sharp 1.1 percent decline in April.

But momentum is still softening, with Westpac card tracking data showing activity barring fuel stoppages in recent weeks.

Reserve Bank deputy governor Andrew Hauser will address the Australian Economic Community on Wednesday.

Meanwhile, Wall Street was closed on Friday for the June 10 federal holiday, but earlier losses were erased thanks to big advances by heavyweight technology companies.

Wednesday’s decline was driven by expectations that the Fed might raise interest rates this year.

The S&P 500 rose 1.1 percent on Thursday, while the Dow industrials rose 0.1 percent. The Nasdaq composite rose 1.9 percent.

Australian share futures fell 16 points, or 0.18 percent, to 5,208.

The S&P/ASX200 fell 82.4 points on Friday, falling 0.92 percent to 8,828.7 points, while the All Ordinaries lost 79.5 points, or 0.87 percent, to 9,047.3 points.

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