Inflation tipped to rise despite falling fuel prices
A lot depends on upcoming inflation numbers as they help determine the direction of the next interest rate decision.
If consumer price data comes in softer than expected on Wednesday, it could signal that inflation is on track to fall below the Federal Reserve’s June forecast and potentially mean the end of the central bank’s rate-hiking cycle.
AMP chief economist Shane Oliver has tipped the Australian Bureau of Statistics to show headline inflation fell 0.4 per cent in May, mainly due to a 15 per cent drop in fuel prices.
However, since inflation fell even more sharply in the previous year, the annual figure will still rise from 4.2 percent to 4.3 percent.
However, the RBA will pay more attention to the trimmed average, a measure of underlying inflation that excludes volatile items such as oil.
Dr Oliver expects the annual adjusted average to rise from 3.4 per cent to 3.5 per cent.
Although oil prices have fallen since the initial rise, higher input costs are still being passed on by businesses, he said.
“You’re seeing the second round effects of the increase in oil prices in March, so fuel duties are being passed on to various building materials and plastics etc,” Dr Oliver told AAP.
The RBA will closely monitor housing costs, which feature heavily in the consumer price basket, and how quickly businesses pass on fuel costs.
The cost of building a new home is expected to continue rising strongly. NAB senior economist Taylor Nugent predicted a 0.8 percent monthly increase.
Mr Nugent said headline inflation was running comfortably below the central bank’s forecast for an annual rise of 4.8 per cent in the June quarter as fuel prices fell faster than the RBA and many other forecasters expected.
But oil prices were still higher than in February and headline inflation was still on the rise.
The extent to which companies pass on high costs to consumers will be important.
Dr. Oliver said if the shortened average falls below the 3.5 per cent annual consensus forecast for May, this could put downward pressure on the RBA’s June quarter forecast.
“There’s a lot riding on the numbers tomorrow because most forecasters, including us, will have two months of data, which gives you a fair idea of how the trimmed average will behave in the quarter as a whole,” he said.
Fuel prices are expected to fall further in June, given that the benchmark Brent oil price fell to around US$77 per barrel after a tenuous ceasefire between the US and Iran dashed hopes that the Strait of Hormuz would be opened to more oil tankers.
But even as more ships pass through the vital waterway, its future remains uncertain and global supply remains well below pre-war levels.
In addition, the government’s fuel excise tax cut will be halved to 16 cents per liter from July 1, before ending at the beginning of August.
Dr. Oliver said even if the price of oil remains at current levels through July, that will be almost entirely offset by an increase in excise taxes.
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