Tim Hext: Australian inflation is heading back to 4pc

Despite higher-than-expected monthly data, the outlook for inflation should be mildly friendly over the next few months, says Pendal’s TIM HEXT

• Why bonds, why now? Pendal’s income and fixed interest experts explain
• Browse Pendal’s fixed interest funds

THE RBA will be encouraged things are moving in the right direction on the inflation front.

The June quarter inflation numbers came in this week at 0.8% for the quarter, or 6% annual.

Underlying inflation (the trimmed mean where they remove the highest and lowest 15%) came in at 0.9%, or 5.9%. 

These outcomes were both 0.2% lower than expected.

The RBA is now forecasting 4.5% by year end. Given we are at 2.2% for the first six months of 2023 this seems a little high if anything.

We forecast 4.2% by year end, unchanged from before.

We last saw a 0.8% result in Q3 2021, just before the very large numbers kicked in.

However this may prove to be a low point for the quarterly number this year as utility prices kick in again in Q3 and Q4.

We expect 1.1% in Q3 and 0.9% in Q4 as goods prices moderate but services remain elevated.  

The high and lows of these numbers

Let’s start with the items that are accelerating.

Rents are finally kicking in, up 2.5% for the quarter and 7.3% for the year. They are finally catching up with other rental indicators and should remain at 2.5% a quarter for a while yet.

Find out about

Pendal’s Income and Fixed Interest funds

Read more

Insurance was up 5.3% for the quarter – no surprise for anyone who has received a payment notice recently.

International travel was up 6.5% in the quarter, again of little surprise.

On the high, but moderating side was new home dwellings.

They rose by 1% in the quarter, though that’s a long way down from the peak. The supply side issues in building seem to be finally working their way through.

On the low side, five of the 11 categories actually saw prices slightly fall.

Most of these were due to government subsidies, highlighting the impact both federal and state governments are having on dampening inflation.

Health, education, electricity and gas were impacted by government subsidies, highlighting the impact governments are having on dampening inflation. Q3 and Q4 will see utilities rebound sharply.

More genuine were falls in motor vehicles, telecommunications and domestic holiday travel as supply constraints ease.  

Goods versus Services

Services inflation is finally higher than goods.

The ABS provided us with this graph below, which highlights services inflation above 6% — not seen since GST started in 2000.

Given the strong link to wages this highlights the RBA point that wage growth above 4% with no productivity is not consistent with target inflation.

The RBA

Despite strong employment data this number should continue to provide the RBA headroom to stay on hold.

August will be Dr Lowe’s second last meeting in charge and having moved 4% in a little over 12 months there is room for further patience.

It will be interesting to see if the inflation forecasts are lowered again, although they lowered them in May and hiked anyway so perhaps it doesn’t matter too much.

Three-year swap is now around 4.25%, and the market has one more hike priced in.

I suspect the RBA will keep one more hike up its sleeve and if unemployment has not risen by October they may execute.

This would be Michele Bullock’s first meeting in charge where she may choose to stamp her mark as an inflation-fighting governor.

About Tim Hext and Pendal’s Income & Fixed Interest boutique

Tim Hext is a Pendal portfolio manager and head of government bond strategies in our Income and Fixed Interest team.

Tim has extensive experience in banking, financial markets and funding including senior positions with NSW Treasury Corporation (TCorp), Westpac Treasury, Commonwealth Bank of Australia, Deutsche Bank, Bain & Co and Swiss Bank Corporation.

Pendal’s Income and Fixed Interest boutique is one of the most experienced and well-regarded fixed income teams in Australia.

The team won Lonsec’s Active Fixed Income Fund of the Year award in 2021 and Zenith’s Australian Fixed Interest award in 2020.

Find out more about Pendal’s fixed interest strategies here

About Pendal

Pendal is a global investment management business focused on delivering superior investment returns for our clients through active management.

In 2023, Pendal became part of Perpetual Limited (ASX:PPT), bringing together two of Australia’s most respected active asset management brands to create a global leader in multi-boutique asset management with autonomous, world-class investment capabilities and a growing leadership position in ESG.

Contact a Pendal key account manager