It won’t be a case of ‘rate rise looms’ if the forecast surge in the Consumer Price Index for the June quarter and 2020-21 financial year happens in today’s Australian Bureau of Statistics data release.
Forecasts seem to be a range of an annual rate of 3% to 3.9% from the 1.1% rise in the year to March.
The sharp increase will come as the economy reverses direction thanks to the lockdowns in Sydney and Victoria and South Australia (the latter now being eased).
In fact the economy is softening and that has seen a spate of forecasts for the September quarter economic growth changed from a flat result to a contraction by as much as 0.7%.
The June quarter will be positive, thanks to the strong terms of trade and trade performance and the active home building and real estate sectors but the outlook for the rest of 2021 has been dragged back by what now looks like an extended lockdown in Sydney.
Pointing that way to the slowdown was a sharp easing in household consumption in the month of June thanks to the latest Victorian and then NSW soft lockdowns (hardened up in July). That saw retail sales fell a sharpish 1.8% instead of a forecast smaller fall.
With slowing growth and a probable negative reading for the September quarter, an inflation rate of 3% or more will push the economy into something not seen for decades – deep stagflation.
According to forecasts we will see the release of the CPI showing a 3% annual rate for the 2020-21 financial year (the Moody’s ratings group) – or as high as 3.9% according to the AMP’s Shane Oliver.
On a quarter-on-quarter basis June CPI inflation is expected to show a sharp rise of 0.8% reflecting a 7.5% surge in petrol prices, higher electricity prices in WA and some pick up in dwelling purchase prices and rents.
The AMP’s Shane Oliver says the dropping out of the 1.9% slide in the CPI seen in the June quarter last year “will see the long-awaited spike in annual inflation to 3.9% year on year ” in the June quarter.
“Underlying inflation will likely accelerate reflecting supply constraints and strong demand to +0.5% quarter on quarter and an annual rate of 1.6%.
Producer price inflation is also likely to big rise due to higher commodity prices on Friday.
GDP grew 1.8% in the March quarter and 1.1% in the year to March. Now a contraction this quarter of 0.7% has been forecast by the likes of Shane Oliver and by Bill Evans, his counterpart at Westpac.
Inflation at 3.0% annual will trim GDP for the financial year to 2.0% (because the 7.0% fall in the three months to June, 2020 drops out of the comparison). It will also mean a fall in real wages, based on the Wage Price Index rise of 1.5% in the year to March.
And even if the December quarter sees a rebound in GDP and a slowing in inflation, it will still put a big hole in the Reserve Bank’s aims to boost inflation and wages growth by 2024.
