Bleak Economic Outlook May Deepen Cost-of-Living Pressures for Australians

The next set of inflation figures is carrying significant weight, with the data likely to influence the Reserve Bank’s upcoming interest rate call.

Should Wednesday’s consumer price numbers come in below expectations, it may suggest inflation is tracking beneath the RBA’s June forecast, raising the prospect that the central bank’s rate-hiking cycle has reached its endpoint.

AMP chief economist Shane Oliver expects Australian Bureau of Statistics data to show headline inflation slipped 0.4 per cent in May, largely driven by a 15 per cent drop in fuel prices.

Even so, because inflation fell more sharply over the same period a year earlier, the annual rate is still expected to edge up from 4.2 per cent to 4.3 per cent.

The RBA, however, is likely to focus more closely on the trimmed mean measure, which strips out volatile price movements including petrol.

Dr Oliver forecasts the annual trimmed mean will increase from 3.4 per cent to 3.5 per cent, remaining clearly above the RBA’s two to three per cent target range.

HSBC chief economist Paul Bloxham said the central bank faces an “uncomfortable choice” as it weighs the need to curb inflation against the risk of slowing the economy too sharply.

“Our view is that the downswing began in March and is already clear in a range of indicators,” Mr Bloxham said.

‘The only question has been how big the downturn will be and what would drive it.’

Even though fuel prices had come down since the initial oil spike, higher input costs were still being passed on by businesses, Dr Oliver said.

‘You’re seeing the second-round effects from the March rise in oil prices, so the fuel levies flow on to various building materials and plastics and so on,’ he told AAP.

EXCLUSIVE: Inside America’s New Obesity Capital, Where Giant Burgers Define the Local Diet

The RBA will be keeping a close eye on housing costs, which are weighted heavily in the consumer price basket and will indicate how quickly businesses are passing on fuel costs.

The cost of building a new home is expected to keep rising strongly. NAB senior economist Taylor Nugent has pencilled in a monthly increase of 0.8 per cent.

Because fuel prices have fallen faster than expected by the RBA and most other forecasters, headline inflation was tracking comfortably below the central bank’s pick of a 4.8 per cent annual rise in the June quarter, Mr Nugent said.

But oil prices were still higher than February and underlying inflation was still on the way up.

The extent to which firms were passing on higher costs to consumers will be key.

If the trimmed mean came in below the consensus bet of 3.5 per cent annually for May, that could put downward pressure on the RBA’s June quarter forecast, Dr Oliver said.

‘A lot is riding on the numbers out tomorrow because most forecasters, including ourselves, will then have two months’ worth of data, which gives you a fair stab at estimating how the trimmed mean will have behaved in the quarter as a whole,’ he said.

Fuel prices are set to fall even further in June, given the benchmark Brent oil price has dipped to about $US77 a barrel after a shaky ceasefire between the US and Iran lifted hopes that the Strait of Hormuz will open up to more oil tankers.

But even as more ships sail through the vital waterway, its future remains uncertain and global supplies remain well below pre-war levels.

On top of this, the government’s fuel excise reduction will be halved to 16c a litre from July 1 before expiring at the start of August.

So even if the oil price stays at current levels throughout July, it will be almost entirely offset by the rise in the excise, Dr Oliver said.