Weekend Economist: Steady as she goes

By Bill Evans

If the RBA also expects that profile it might mean that the original forecast of 1 per cent for underlying inflation in the second half of 2014 implied a 0. 4 per cent or 0. 3 per cent forecast for underlying inflation in the September quarter due to an indirect carbon tax effect.  Reverting back to a “normal” quarterly read on the December underlying print (especially given the recent fall in the Australian dollar and the indirect effects of the fall in the oil price) is likely to push the RBA to revise up its near term forecast for underlying inflation to a (still non-threatening) 2. 5 per cent from 2. 25 per cent. That 2. 5 per cent is closer to our own view of 2. 4 per cent than the RBA’s current forecast of 2. 25 per cent.

We believe there is a risk that the RBA will have to revise up its forecast for underlying inflation in 2014 from 2. 25 per cent to 2. 50 per cent. Despite a very low (0. 3 per cent) read for headline inflation in December quarter due mainly to lower petrol prices (reflecting the big fall in the oil price) underlying pressures are expected to lift from the September quarter partly due to seasonal factors.

Despite some significant changes in markets and likely the underlying forecasts for the Australian dollar and commodity prices we do not expect them to change their core views. trend in 2016. in 2015 although we think it will be necessary to “tweak” the underlying inflation forecast higher in 2014.

Read more here: Business Spectator


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