Inflation to slow after likely Q4/22 peak: NAB

National Australia Bank (NAB) is expecting inflation to slow through 2023 after it was “expected to have peaked” in Q4/22, the major bank has said.

In anticipating forthcoming Australian Bureau of Statistics’ (ABS) Consumer Price Index (CPI) data on Wednesday 25 January, NAB global market research economist Taylor Nugent said lower-than-expected fuel prices and lower-than-feared fruit and vegetable prices,  despite recent floods, mean the major bank now expected 1.6 per cent quarter on  quarter (QoQ) and a peak of 7.5 per cent inflation year on year (YoY) - below the Reserve Bank of Australia (RBA)’s 8.0 per cent YoY November SoMP forecast, it has explained.

NAB says, though, it expects the detail to provide “little comfort about the inflation backdrop” with strong ‘services inflation’ likely.

In terms if trimmed mean, the major bank has forecast 1.6 per cent QoQ and 6.6 per cent YoY, which it described as “a touch above” the RBA’s November forecast for 1.5 per cent QoQ.

As Mr Nugent explained: “While our forecast print is lower than Q3’s 1.8 per cent, on our numbers this is almost entirely due to slowing new dwelling construction cost rises.”

“We expect market services and labour-market sensitive inflation to remain uncomfortably strong amid elevated labour cost growth and strong demand,” he outlined.

The economist listed notable drivers for inflation in the quarter will be “unseasonal increases” in electricity, as “the measured effect of subsidies in Q3 partially unwind (concentrated in WA), and in health as some insurers delayed premium increases to November from April.”

Additionally, the NAB Business Survey for November also showed elevated final prices in retail, and in ‘rec & personal’ with “our mappings consistent with a 1.6-1.7 QoQ print,” he said.

The Melbourne Institute’s Inflation Gauge also mapped to a 1.6 per cent QoQ print, Mr Nugent added.

A CPI drop as rate rises kick in

NAB explained that it expects headline inflation is likely to fall back below 7 per cent YoY in Q1/23 and be around 6 per cent in Q2/23.

“Looking forward, we expected inflation to slow through 2023, particularly YoY,” explained Mr Nugent.

“Goods and new housing are expected to be key sources of disinflation,” he proffered conversely.

“Supply chains have rapidly unsnarled, product availability has improved, and shipping costs have fallen.

“Price rises for new dwelling construction has also materially slowed with a risk of some price falls for new contracted homes over the year ahead,” he said.

Ultimately, though, Mr Nugent resolved that inflation is broad-based and that the “tight labour market” and “accelerating labour costs and earnings” remain.

“A second year of large electricity price increases is also expected in Q3 2023 CPI,” he warned.

“Although CPI is important, key for the RBA in being confident in getting inflation back to target will be wages growth with WPI on 22 February.

“We expect the RBA to hike rates by 25bp on 7 February and in March,” he confirmed.

A common big bank vibe

Fellow major bank Westpac also recently touted an easing on inflation pressures through this year, in its consumer sentiment bulletin released on Tuesday (17 January).

Westpac chief economist Bill Evans commented: “Westpac is expecting the cash rate to rise by a cumulative 0.75 per cent in the remainder of this cycle and other analysts are even more optimistic.”

“Presumably, the improving interest rate outlook has been tempered by the latest monthly inflation report, which showed a significant increase in annual inflation to November of 7.3 per cent, up from the 6.9 per cent in October,” Mr Evans explained.

“As we move through 2023, we expect inflation pressures to ease, slowly boosting confidence although it is likely to remain well below par during the year,” he concluded.

[Related: Inflation uncertainty ‘top threat’ for financial sector]