Anna Hong: The last mile for Australian disinflation

Pendal assistant portfolio manager ANNA HONG unpacks the latest monthly CPI data and highlights some of the key takeaways for investors

• The last mile will not be a smooth run
• There remains optimism that inflation will fall closer to 3% by mid-year
• Why bonds, why now? Find out more from Pendal’s income and fixed interest team

AUSTRALIAN monthly CPI of 3.4% year-on-year (YoY) came in a touch lower than market consensus.

Meanwhile, trimmed mean CPI (with the top and bottom 15% cut off) came in at 3.9%.

Though the monthly CPI shows clear signs of disinflation, it appears that the last mile will not be a smooth run.

The Reserve Bank of Australia references the quarterly CPI measure in its decision-making, and February’s numbers update the quarterly CPI basket.

We expect headline and underlying inflation, released in late April, to be around 0.8% for Q1.

It is evident that the rate hikes have taken a toll on the Australian consumer, with real consumption in negative territory.

Goods inflation is back below 2%, while services remains sticky – above 5%.

The table below highlights improvements over the past six months along with the need for further falls.

We have also had important updates in a few key service areas this month.

Housing

Rents remain elevated at 7.6% (YoY), which is not a surprise given the apartment supply challenges driven, in part, by the current immigration wave.

Adding to this is the 4.9% (YoY) increase in new dwelling prices (the cost of building) in February.

Builders have been able to pass higher labour and material costs onto homeowners.

Education

Education prices are measured only once a year (in February) and represent 4.4% of the CPI basket.

Education prices rose 5.9% (YoY) over February, with the main contributor being primary and secondary schools passing on the high wage rises for teachers announced in late 2023.

Teachers’ wages will show more moderate growth in 2024, however, so next year’s number should be lower.

Looking ahead, tertiary education inflation remains high, as lags in indexation came through this February.

Health

The news on the health front (which is 6.2% of the CPI basket) was better than education.

Health fund rises approved for April (also measured once a year in the CPI) were set at an average of 3.1%.

The RBA needs services inflation at or below 4% before it will be comfortable with inflation.

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What does this mean for investors?

It was unlikely that the RBA was going to cut in the first half of 2024 – these numbers and the slowing of the disinflation impulse all back this up.

However, there remains optimism that inflation will fall closer to 3% by mid-year, which would allow rate cuts from August.

In the meantime, movements from the US Federal Reserve in between will also play a role in the last mile.

About Anna Hong and Pendal’s Income and Fixed Interest team

Anna Hong is an assistant portfolio manager with Pendal’s Income and Fixed Interest team.

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

With the goal of building the most defensive line of funds in Australia, the team oversees some $20 billion invested across income, composite, pure alpha, global and Australian government strategies.

Find out more about Pendal’s fixed interest strategies here

About Pendal Group

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

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