Australia CPI Preview: Forecasts from five major banks, easing annual inflation

We expect the monthly CPI indicator for May to show an annual lift of 6.0%, though expected increases in electricity and housing costs pose upside risks thereafter.

We expect monthly headline inflation to decline from 6.8% to 6.1% in May, which would reverse the pickup from 6.3% to 6.8% in April. Again, the main driver for the changes in headline inflation should be auto fuel prices as they rose in April and then declined in May following that of crude oil prices.

The Citi Research forecast based on high-frequency indicators suggests that monthly headline inflation decelerated sharply in May from 6.8% to 6.1%, implying a MoM increase of 0.1%. However, markets should ignore the monthly headline price movements and instead focus on the components because not every expenditure class is measured monthly. In May, 64% of services and 76% of goods prices are updated. Overall, 71% of the basket was measured in May. The details will still point to hawkish risks outside volatile categories, and the RBA will likely hike again by 25 bps in July and August.

For the Monthly CPI indicator, we pencil in 5.9% YoY from 6.8% as base effects from fuel price drive the headline lower. and a 6.1 median. The magnitude of the drop is likely to paint an overly rosy picture of the pace of disinflation given it is base effect driven and we expect the full Q2 CPI on 26 July to print above the May Indicator. The excl. fuel, fruit/veg, and travel number is likely to show much less moderation from April’s 6.5%.

We expect May monthly CPI to print at 5.8% YoY, a big drop from the 6.8% YoY in April in part due to the high base last year. A notable decline in petrol prices (-6.1% MoM) is also another contributor to the lower May CPI print while we could also see recreational prices give back some gains over the month after the Easter holidays. Given a red-hot labour market and the RBA's increasingly hawkish message on inflation, we think another 25 bps make sense at the July meeting as the monthly inflation print still remains far above the RBA 2-3% inflation target.