Headline annual inflation is tipped to climb to 4.3 per cent in the first quarter, before peaking at around 4.75 per cent during the second quarter, according to revised forecasts from ANZ.
As the RBA closely monitors inflation, ANZ said that it had upgraded its forecasts due to the near-term inflation pressures of the Russia-Ukraine war and flooding in NSW and Queensland, most notably on petrol and food prices.
“Average petrol prices aren’t far off $2 a litre, and we are forecasting oil prices to rise further in the near term,” said ANZ senior economist Catherine Birch.
“We were already expecting strong food price inflation in Q1 due to Omicron-related disruptions to supply chains and worker availability, but the flooding will add to this, affecting both food production and supply chains.”
The bank predicted that higher petrol and food prices would add around 0.3 percentage points to the quarterly headline inflation reading for Q1 compared to its previous forecast.
Meanwhile, ANZ said that the trimmed mean measure of inflation, the preferred inflation measure for the RBA, would peak at approximately 3.75 per cent during Q2, up from its earlier forecast of 3.6 per cent.
“Trimmed mean inflation will be less affected, as, by definition, it excludes the most volatile components of the CPI in each quarter,” explained Ms Birch.
“But second order effects and the flood rebuild, particularly at a time when the construction pipeline is already very large and capacity is constrained, could take trimmed mean inflation marginally higher than our previous track.”
Price pressures are expected to unwind in the second half of this year and into 2023 according to ANZ, dependent on the Russia-Ukraine war remaining relatively short.
Based on this outlook, the bank said headline inflation would trough at 2.6 per cent in Q2 2023, lower than previously expected, and both headline and underlying inflation would sit within or slightly above the RBA’s 2-3 per cent target band at the end of next year.
As for the expected timing of the RBA’s first interest rate rise, ANZ highlighted comments from RBA governor Philip Lowe last week that indicated the bank would continue to focus on lower unemployment and higher wage growth.
“In these circumstances, we have scope to wait and assess incoming information and see how some of the uncertainties are resolved,” Dr Lowe said.
While other major banks have pointed to rates rising as early as June, ANZ said that Dr Lowe’s comments supported the view that rises were more likely to take place in Q3 rather than Q2.
However, the RBA governor also noted that higher inflation could become “more persistent and broad-based and require a larger monetary policy response” if supply shocks lead to a move away from the current “low-inflation psychology”.
“Evidence that such a shift is underway could see the RBA move earlier than Q3. Regardless, the evolving situation in Ukraine and consequent effects on growth and inflation will reverberate for some time,” Ms Birch concluded.
