📝 Our Q3 CPI Forecast Would Represent An Upside Surprise to RBA's SoMP: NAB

While services inflation is set to remain high, we expect progress on goods disinflation to sustain in Q3. Indeed, all the moderation in inflation to date has occurred on the goods side. At its peak in 2022, market goods (excluding food and houses) was adding close to 11⁄2ppt to annualised inflation. As global goods demand has moderated, supply chains have unsnarled, and global shipping costs have rapidly normalised, goods price pressures have eased and we expect goods inflation to continue to support the disinflation process going forward. We forecast a broadly flat contribution to CPI in Q3 for market goods ex houses and food.

Our forecast would represent an upside surprise to the RBA’s August SoMP forecast, and while NAB Economics forecasts are for continued disinflation as the economy experiences a period of below trend growth, we expect more gradual moderation in the near term than the RBA hopes. NAB’s view is that the RBA is likely to lift rates at the November meeting, acting on its tightening bias to get more comfort that inflation is on the required path back to 2-3% in a reasonable time frame. There is a flurry of RBA communication in the coming weeks, including 2 appearances by Governor Bullock ahead of the CPI release on 25 October. We will be looking closely for hints on whether the RBA is patient, but in a genuine calibration phase, or whether they would need a more material surprise to be wrested from an on-hold stance. - NAB