Tim Hext: January inflation – a low point, for now

January data suggests inflation continues to moderate. But we shouldn’t read too much into this better-than-expected outcome, writes Pendal’s head of government bond strategies TIM HEXT

• Monthly data supports the theme of moderating inflation
• The months ahead will see a more balanced CPI outcome.
• Why bonds, why now? Pendal’s income and fixed interest experts explain
• Browse Pendal’s fixed interest funds

THE January inflation numbers showed a continuation of the theme of moderating inflation.

Prices were 3.4% higher than January 2023.

More impressively, prices were down 0.3% in January from December – though this number is not seasonally adjusted and January is usually a weaker month.

This continues the downward path to inflation, in place since the 8.4% high in December 2022.

Source: ABS, 2024

Monthly CPI price data sets are not comprehensive, but quarterly are.

Only around 60% of the basket is tracked every month, while 30% is collected once a quarter (with different items in different months) and 10% is annual (with education in February, health insurance in April, and council rates in September).

So effectively, most monthly CPI prints cover 70% of the basket. The others are kept flat.

The list of prices going down in January is quite long; fuel, clothing, furnishings, and recreation all helped reduce inflation.

However, utilities went up (but less than expected), while food prices rose a bit more than expected.

Overall, we shouldn’t read too much into this better-than-expected outcome and the market reaction has also been quite muted.

It does make us more confident on our 0.8% forecast for the March quarter CPI due late April – and if anything, we might lower it to 0.7%.

This would see annual inflation (as measured quarterly, not monthly) also fall to 3.4% – near the RBA forecast of 3.3% of CPI by June.

However, we will have to wait for the September quarter 2023 number of 1.2% to drop out in October for CPI to have a chance of hitting 3%.

The months ahead will see a more balanced CPI outcome.

For items only measured once a quarter, January is goods-heavy, while February and March are more services-heavy – and services are where the higher pressures are. This will be especially so when education hits the February numbers.

If anyone is interested in a breakdown of the path back to low inflation this year, please read my article in our recent Australian Quarterly Update.

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Oil remains the main x-factor to these forecasts and prices have edged steadily higher in recent weeks, though still in range for now.

The RBA will remain confident that its inflation forecasts are being met.

This does not mean rate cuts in the months ahead, but if the Fed were to start cutting in May, it still opens the door for lower rates here in the second half of 2024.

We remain biased to being overweight duration but will continue to adjust positioning based on market levels in a range-trading market.

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.

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