NAB has further increased its near-term outlook for inflation and now expects Australia will see a quarterly lift in underlying inflation of 1.7 per cent in Q3 and 1.5 per cent in Q4.
According to the bank, this would lead annual trimmed mean inflation to peak at 6.3 per cent in the final quarter of the year, up from its previous forecast of 5.6 per cent, while headline inflation is predicted to reach a peak of 7.5 per cent in line with NAB's earlier forecasts.
The latest consumer price index (CPI) figures from the Australian Bureau of Statistics showed that headline inflation lifted 1.8 per cent in the June quarter and 6.1 per cent annually, while underlying inflation climbed 1.5 per cent over the quarter and 4.9 per cent over the year.
NAB explained that it had made the changes to its outlook based on the ongoing strength in activity along with cost and price measures in its recent business surveys.
“While supply chain pressures have continued to ease in most areas, and food and petrol prices have eased in Q3, the NAB Monthly Business Survey continues to point to strength in cost pressures and indicates businesses are passing these pressures onto final consumer prices,” the bank said.
“Consequently, we expect another very strong print for the trimmed mean measure in Q3 and Q4 before pressures begin to ease. That sees inflation peaking in Q4 at very high rates for both headline and underlying measures.”
The bank’s prediction for underlying inflation is slightly higher than that of the Reserve Bank (RBA), which forecasted a peak of 6.0 per cent in Q4. NAB confirmed it does not currently expect headline inflation to reach 7.75 per cent in Q4 as the RBA has outlined in its forecasts.
“Domestically, short-term inflation expectations have risen in line with surging CPI results, and while longer-term expectations remain anchored, even the RBA's own forecasts for CPI only reach 3 per cent at the end of 2024,” NAB said.
“The longer inflation remains elevated, the greater the risk that expectations become de-anchored.”
NAB also stated that, while Australia is still a long way away from a wage-price spiral, growth in wages could move well above forecasts if higher inflation expectations feed into wage negotiations in the coming years.
Wage growth — which NAB said is set to become “an increasingly important driver of inflation as international factors wane” — is currently predicted to sit at 3.2 per cent by the end of 2022, and 3.4 per cent by the end of 2023 from 2.6 per cent as of the end of the June quarter.
“Faster-than-expected wage growth would put upward pressure on inflation, likely requiring more contractionary monetary policy even if global inflation pressures ease,” the bank said.
“The resilience of consumption growth to high inflation and rising interest rates remains the largest source of uncertainty around the economic outlook.”
As for interest rates, the bank's predictions remain unchanged with increases of 25 basis points (bps) expected at the RBA's meetings in October and November, taking the cash rate to its highest level since 2013 at 2.85 per cent.
“We expect the RBA to pause there to allow an assessment of the impact on the economy of the rapid increase in rates over recent months, as well as the outlook for both the labour market (particularly wage growth) and how quickly current inflation pressures may resolve,” NAB predicted.
RBA governor Philip Lowe recently indicated that the central bank does not intend to shift to a slower pace of monetary tightening just yet after lifting the cash rate by a cumulative 2.25 percentage points since May.
Meanwhile, NAB said that the June quarter National Accounts, which showed a 0.9 per cent increase in GDP during the June quarter that pushed the annual growth rate to 3.6 per cent, did not fundamentally change its view of the Australian economy moving forward.
“While base effects see a small revision to 2022, we continue to see below trend growth of around 1.75 per cent over 2023 and 2024 as the impact of the lockdown rebound ends, global growth slows and higher rates and prices begin to weigh domestically,” the bank said.
Jon Bragg
Jon Bragg is a journalist for Momentum Media's Investor Daily, nestegg and ifa. He enjoys writing about a wide variety of financial topics and issues and exploring the many implications they have on all aspects of life.
