Get ready for a hot topic! Australia's January CPI report is about to drop, and it's going to spark some serious debate.
The Big Picture: Inflation's Dual Nature
While the headline CPI is expected to show a 0.4% monthly increase, driven by electricity prices, the underlying inflation story is just as crucial. Annual inflation is predicted to land between 3.6% and 3.7%, which is still significantly above the RBA's target range.
But here's where it gets controversial...
Electricity prices are a wild card. As cost-of-living rebates fade, they're expected to push the headline CPI higher. But this volatility might mask the true underlying inflation trend. Food and health costs are also adding to the upward pressure, while automotive fuel and holiday travel costs are expected to provide some relief.
The Underlying Story: A Closer Look
Both Commonwealth Bank of Australia and Westpac are focusing on the trimmed mean, which is expected to rise by 0.3% in January. This indicator provides a clearer picture of persistent inflation, and it's forecast to remain steady at 3.3% annually. Westpac even hints at a slight moderation in momentum, with a potential drop to 3.4% over six months.
And this is the part most people miss...
CBA's alternative measure, the three-month-on-three-month trimmed mean, is expected to soften slightly, indicating a quarterly trimmed mean of 0.8% in Q1 2026. This is marginally below the RBA's forecast, but still a sign of persistent price pressures.
Policy Implications: The RBA's Move
Despite this slight moderation, CBA believes the RBA will hike rates in May. They argue that the recent Board signalling and upward revisions to the output gap and neutral rate suggest a continued tightening cycle.
The Bottom Line: Focus on the Trimmed Mean
With the headline CPI potentially misleading due to electricity volatility, markets will likely zero in on the trimmed mean. It's the cleaner gauge of inflation persistence and will provide a more accurate picture of Australia's economic health.
So, what do you think? Is the RBA on the right track with its rate hike plans? Let's discuss in the comments!
