Weaker fuel prices to weigh on Australia’s headline CPI again in Q1 2016

Australia’s inflation pulse is expected to remain low in Q1 2016 on back of a weak global inflation scenario, weak wages growth, solid international competition and weaker price pressures in residential construction, according to ANZ. The underlying inflation is likely to be lower than the central bank’s 2%-3% target rate, while the headline CPI is expected to be weighed on by weaker fuel prices again, added ANZ.

“The average of the underlying inflation measures is forecast to rise by 0.5% q/q and 1.9% y/y”, noted ANZ.

According to ANZ’s daily tracking of petrol prices, the prices are expected to drop 10.8% in Q1 2016, subtracting 0.3ppt from the headline CPI. Meanwhile, international holiday travel and accommodation prices, and fresh fruit prices are expected to drop in Q1. However, the effects are expected to be slightly countered by seasonal rises in childcare, education and health.

The main focus will be on whether the fourth quarter’s acceleration in tradables inflation has continued, said ANZ. However, it is doubtful if it has persisted given the drop in retail margins in the fourth quarter of 2015, the deepening of international competition.

Also, the focus will be on whether the softness in new house purchase costs in the fourth quarter is repeated, added ANZ. While residential construction is forecast to slow, it might be quite soon for a sustained pull-back in price pressures due to the persistent strong level of activity in construction. According to ANZ, the inflation profile is not expected to be that weak over a longer period of time to set off a policy response by the RBA.