The Australian Bureau of Statistics (ABS) will release two different inflation reports on Wednesday. On the one hand, the organism will publish the quarterly Consumer Price Index (CPI) for the last quarter of 2023, and on the other hand, the Monthly CPI, estimated annually, for December. Additionally, the quarterly report includes the Trimmed Mean Consumer Price Index, the Reserve Bank of Australia's (RBA) favorite inflation gauge.
The figures are critical ahead of the RBA monetary policy meeting on February 6, as the central bank aims to keep the annual CPI rate between 2% and 3%. Price pressures in Australia are clearly moving in the right direction, although they are still above the desired levels.
The central bank is expected to leave the Cash Rate unchanged at 4.35%, as it did in the December meeting, following a 25 basis points (bps) hike in November. Previously, the RBA had held rates steady for four consecutive months. The November decision resulted from the Board assessing inflation was easing at a slower pace than earlier forecast.
The ABS is expected to report that inflation was 3.7% YoY in December, down from the 4.3% posted in November. The quarterly CPI is foreseen rising 0.8% QoQ and up 4.3% YoY in the three months to December, while the RBA Trimmed Mean CPI rate is foreseen at 4.3% YoY, declining from the previous 5.2%.
The anticipated gauges would support an on-hold RBA, but it is too early to discuss rate cuts in Australia. In its latest Statement on Monetary Policy, which is published quarterly in February, May, August and November, policymakers forecasted that it will take until late 2025 for inflation to moderate to under 3%, finally falling into the target range.
“Inflation is forecast to decline to 3½ per cent by the end of 2024 and to reach a little below 3 per cent at the end of 2025. The forecast decline in inflation is more gradual than anticipated three months ago because domestic inflationary pressures are dissipating more slowly than previously thought,” according to the official document. Furthermore, it added: “Growth in the Australian economy is expected to remain below trend over 2023 and 2024 as cost-of-living pressures and higher interest rates continue to weigh on demand.”
Finally, the International Monetary Fund (IMF) advised Australia to lift interest rates further to achieve its inflation target before 2026.
In such a scenario, trimming the Cash Rate seems out of the table at the time. If anything, inflation-related figures need to decline much more than anticipated throughout the next few months to allow policymakers a rate-cut discussion. At least, it seems safe to say that rates have peaked.
It is worth adding that the market is moving ahead of policymakers. In early January, speculative interest was pricing in six rate cuts for 2024, with the Cash Rate expected at 3.75% by the end of the year. That means softer-than-anticipated CPI figures could boost rate-cut odds regardless of RBA’s ability to deliver them.
CPI readings will have a significant impact on the Australian Dollar (AUD) as the figures will guide the RBA's upcoming monetary policy decisions. As usual, the wider the deviation of the outcome from expectations, the larger the price movement. Generally speaking, higher-than-anticipated numbers fuel expectations of rate hikes and tend to boost the AUD. On the contrary, softer-than-expected figures should fuel hopes for soon-to-come rate cuts, and weigh on the local currency, at least in the near term. As the dust settles, easing price pressures should be understood as good news, and end up benefiting the Aussie in the longer run.
From a technical perspective, AUD/USD trades in the 0.6580 region ahead of the events, after posting a weekly peak of 0.6624 on Tuesday. According to Valeria Bednarik, FXStreet Chief Analyst, “the risk skews to the downside in the daily chart. The pair is currently developing just above a directionless 200 Simple Moving Average (SMA), stuck around the indicator for a second consecutive week. Furthermore, the 20 SMA maintains a firmly bearish slope above the current level, providing dynamic resistance at around 0.6630. Finally, technical indicators stalled their recoveries within negative levels and are slowly resuming their slides, reflecting persistent selling interest.”
Bednarik adds: “Buyers are defending the downside in the 0.6550/60 region, with a break below it exposing the 0.6500 threshold. Below the latter, AUD/USD has scope to test a strong static support level at 0.6470. On the flip side, the pair needs to recover beyond the aforementioned 0.6630 to gain upward traction and approach the 0.6700 figure.”
Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.
The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.
Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.
Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it.
Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.
The Consumer Price Index (CPI), released by the Australian Bureau of Statistics on a quarterly basis, measures the changes in the price of a fixed basket of goods and services acquired by household consumers. The CPI is a key indicator to measure inflation and changes in purchasing trends. The QoQ reading compares prices in the reference quarter to the previous quarter. A high reading is seen as bullish for the Australian Dollar (AUD), while a low reading is seen as bearish.Read more.
Next release: 01/31/2024 00:30:00 GMT
Source: Australian Bureau of Statistics
The quarterly Consumer Price Index (CPI) published by the Australian Bureau of Statistics (ABS) has a significant impact on the market and the AUD valuation. The gauge is closely watched by the Reserve Bank of Australia (RBA), in order to achieve its inflation mandate, which has major monetary policy implications. Rising consumer prices tend to be AUD bullish, as the RBA could hike interest rates to maintain its inflation target. The data is released nearly 25 days after the quarter ends.