Tim Hext: Has the Aussie disinflation trend come to a halt?

Here’s what the latest inflation data means for markets, according to Pendal’s head of government bonds TIM HEXT

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HAS a two-year disinflation trend in Australia finally come to a halt?

Today we received the Monthly CPI series for April. The headline numbers show prices 2.4% higher in April compared to the same period last year – the same as February and March.

The monthly trimmed mean (which removes the most extreme price movements to show the broader trend) was 2.8% – a small uptick from March.

Source: Monthly CPI indicator rises 2.4% to April 2025 | Australian Bureau of Statistics

As reminder, the monthly series tracks around 60 per cent of prices every month, 30 per cent every three months (varying by months), and 10 per cent once a year.

Therefore, the series can be volatile and is still not fully trusted by the RBA.

In her last press conference, Governor Michele Bullock reminded us once again that the RBA relies heavily on quarterly numbers.

The second quarter is young, but our early forecast for the quarterly inflation numbers released on July 30 is 0.8% for both headline and underlying.

What’s driving disinflation

There have been three main drivers of disinflation over the past two years.

Firstly, the most clear and obvious is the passage of time as we exit from pandemic supply shocks in many areas. It took a bit longer than we would have liked, but it did happen.

Secondly, monetary and fiscal policy have been contractionary. Added to this were government subsidies across several key areas at federal and state level.

Thirdly, as inflation fell, so did wages, creating a positive downside loop between the two and reversing the opposite from 2021 to early 2023.

However, all these have now either run their course or may even be heading in the opposite direction. Rates are coming down, fiscal policy is expansionary again, and there are few – if any – additional supply levers to pull.

From here, we expect services inflation to become very sticky around 3.5%. In fact, the risk is that services move a bit higher, with 4% more likely than 3%.

New dwelling costs (as measured by project homes) have been flatlining despite higher building prices. Margin pressure will see inflation resume there shortly.

Health inflation looks too low given actual costs, with health providers being squeezed as the government leans on health insurance costs.

And will private schools move back from 6% fee hikes to 3%? Unlikely.

Against this is an expectation that tariff wars may mean China and others move supply to Australia, seeking more demand through discounting. Goods prices have been growing around 1% in recent years and, with weaker commodity prices, may begin to flatline or even fall.

It is the only hope for inflation falling significantly further from here. We are, therefore, neutral on inflation at these levels.

Current levels do allow for more rate cuts – however, we do not share the narrative that the RBA has declared victory on inflation and is keen to get cash rates back to neutral (read 3%) sooner rather than later.

This narrative was fuelled by the governor’s recent comments, seeing markets currently price a 60 per cent chance of a July cut.

We think the RBA will still wait for quarterly inflation numbers to greenlight cuts and see August and November cuts as more likely.

Either way, we are still surprised to see Australian bonds above 4% and continue to favour long-duration positions.

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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