Temporary fall in inflation won’t ease RBA fears

The Strait of Hormuz remains closed and supply disruptions are still pushing up global prices, but new data is expected to show Australia’s headline inflation is on track to fall.

Even so, if the predictions are confirmed, the Central Bank will not declare the task completed.

Economists at NAB, CBA and ANZ predict the consumer price index will fall from the 4.6 per cent annual level set in March following new figures to be released by the Australian Bureau of Statistics on Wednesday.

This is largely due to a temporary reduction in fuel taxes rather than a softening of the underlying impulse.

Gasoline prices fell about nine percent for the month, but as diesel prices were still rising, NAB senior economist Taylor Nugent predicted a seven percent decline in automotive fuel.

Therefore, it expects headline inflation to fall to 4.4 percent for April with the effect of the 32 cents per liter reduction in fuel consumption tax.

“This will add to headline inflation in July when the consumption tax cut is relaxed,” Mr Nugent said.

Economists at ANZ and CBA expect an even bigger fall in the consumer price index to 4.3 per cent in April, but Westpac is forecasting an annual rise of 4.8 per cent.

“Lower public transport fares in some states are also expected to have a modest impact on the monthly result,” CBA economist Trent Saunders said.

It said headline inflation, which excludes volatile price movements, was likely to rise from 3.3 per cent to 3.4 per cent, supported by higher new housing costs and a larger rise in private health insurance premiums.

“The key risk for April is how much businesses pass on rising costs, particularly for new homes.”

The speed and breadth of cost transfer has unsettled the Federal Reserve, which faces the evil double dilemma of rising inflation and stagnant activity.

Although markets reacted positively to the White House’s comments that an end to the Iran war was near, little progress was made.

While Hormuz remains effectively closed to shipping, oil stocks will continue to erode and shortages of other vital commodities such as fertilizer will continue to grow.

CBA commodity analyst Vivek Dhar warned that oil futures could rise from US$105 per barrel to around US$150 by mid-June if the status quo continues. It could be $200 by September.

This would not only be disastrous in terms of consumer prices. By then the RBA may be more concerned about economic activity and employment taking a hit.

The labor market showed the first signs of softness last week; Unemployment increased from 4.3 percent to 4.5 percent in April.

Another sign of the blow to the Middle East conflict could come on Thursday, when the ABS is due to release household spending figures.

ANZ economist Aaron Luke expects a 1.3 per cent monthly contraction in April, following a 1.6 per cent increase in March.

While much of this is due to lower fuel prices and free public transportation, discretionary spending is also expected to soften.

Carolyn Hewson will give the first speech by an outside member of the Reserve Bank’s rate-setting panel on Wednesday, but she is unlikely to give much information about interest rates.

His speech at the University of Adelaide will discuss responsibility and leadership in public service and economic decision-making.

Meanwhile, US Secretary of State Marco Rubio’s statement that progress was being made towards an agreement with Iran was enough to increase Wall Street’s excitement.

The Dow Jones Industrial Average rose 294.04 points, or 0.58 percent, to a record closing high of 50,579.70 on Friday.

S&P 500 index increased by 0.37 percent to 7,473.47 points, and Nasdaq Composite increased by 0.19 percent to 26,343.97 points.

Australian stock futures lost 58 points, or 0.66 percent, to 11,542.

The S&P/ASX200 rose 35.3 points, or 0.41 per cent, to 8,657 points on Friday, while the broader All Ordinaries rose 36.4 points, or 0.41 per cent, to 8,877.2 points.

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