Inflation to accelerate in short term, NAB predicts
Inflation may accelerate this quarter with wage pressure and services prices offsetting ongoing disinflation in goods prices, says the major bank.
In a recent insight piece, NAB Group Economics said while the CPI indicator for July showed further improvement in inflation in the month, this is likely to regress in coming months as more services prices are updated.
“A larger number of services will be updated in August including postal and telecom services as well as insurance, while council/property rates which are updated annually will be updated in the September quarter,” said NAB.
“Oil prices have also rebounded to high levels recently and petrol prices will push up the August CPI reading as a result. More broadly, the impact of higher energy costs continues to flow through the economy and present some risk of second-round effects of passthrough to output prices.”
Minimum and award wage rises in July will also likely add pressure to the cost side for the September quarter.
However, the bank expects to see an ongoing moderation in inflation through 2024 as the labour market softens and consumer demand growth slows.
NAB expects that inflation will fall to around 4.4 per cent by the end of this year and 3.1 per cent by the end of 2024.
Given the upside risk with sticky service inflation, the bank predicts there will be one further hike by the RBA this year, most likely in November.
“The recent run of activity data suggests there may be some downside risk to this, but the resilience in the labour market and potential for ‘sticky’ services still present an upside risk,” it said.
The RBA retained its hawkish bias in the minutes of its monetary policy meeting for September, stating that more restrictive policy may be required depending on the balance of risks.
Members of the board said that inflation was still too high and was expected to remain that way for an extended period.
The RBA said that if productivity growth does not pick up as anticipated or if high services price inflation is more persistent than expected, then inflation may stay above the RBA’s target for an extended period.
“Members observed that, were inflation to remain above target for an even longer period, this could cause inflation expectations to move higher, which would be likely to require an even larger increase in interest rates in the future,” the board said in its minutes.
“Such an outcome would be costly for the economy.”
The RBA said that some further tightening in policy may be required should inflation prove to be more persistent than expected.
The board said it will continue to pay close attention to developments in the global economy, trends in household spending and the outlook for inflation and the labour market.
If rates stay on hold at 4.1 per cent, NAB said there is a risk that rates may stay higher for longer in a scenario where the economy remains resilient or inflation becomes sticky.
“Services inflation, in particular, has remained more persistent overseas,” the bank said.
“We continue to see the RBA shifting back towards neutral from mid-2024 with inflation moderating towards the target band and unemployment up near 5 per cent on our forecasts.”
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