Latest CPI data isn’t as promising as you might think

[pedrito]

I’ll preface this by saying I’m generally a bit of a pessimist (although I prefer to call myself a realist).

With the latest quarterly data release, we’ve seen CPI drop to 4.1% YoY for the December quarter. This is obviously good news and is a 1.3% drop from the previous quarter.

On top of this, the 2023 Q4 growth is down to 0.6%, compared to the 1.9% growth in 2022 Q4.

This all looks great at face value, but if you look a little deeper, it’s not actually a good news story. I think it’s the opposite.

Since 2000, the pre-Covid average for Q4 CPI change is 0.4%, which is 0.2% less than what we’ve just had.

So while CPI is returning to a more reasonable level than the last couple of years, the quarterly change is still higher than the long term average. This is despite the rate hikes we’ve seen. Q3 last year was also higher than the long term Q3 average.

If Q1 this year is also above the long term average (0.6%), then I would say this indicates that inflation is persistent and will not return to the target range of 2-3% without further action from either the government or the RBA.

Interesting times still ahead, and I’m not holding my breath for a rate cut.

 

[lindseym1013]

@pedrito 0.6% a quarter is 2.4% annualized which is exactly where the RBA wants it. So you’re right that rate cuts are unlikely if inflation is where the rba wants it.

Your only argument that it’s bad is it was lower before, forgetting that those time periods were “too low” and the rba was trying to stimulate the economy with low rates.

 

[pedrito]

@lindseym1013 Yes, if every quarter is 0.6%, then annualized it’s approximately 2.4% (it’s actually 2.42% due to compounding…).

But since you didn’t read the rest of my post, every quarter isn’t the same, and historically Q4 is the lowest percentage change.

Q3 2023 was 1.2%, the longer term average is 0.9%. Q2 2023 was 0.8%, the longer term average is 0.7%.

If we’re lucky, we’ll be scraping the very top of the target range. And if that’s the case, why would the RBA drop rates? That’s my point.

 

[lindseym1013]

@pedrito Unfortunately I did read all of your useless rant.

Inflation is dropping, from 1.9% a year ago to 0.6%. But brain dead to say that’s not an improvement

 

[pedrito]

@lindseym1013 Damn. Maybe you need to work on your self control then, because no one forced you to read it lmao.

I also didn’t say it’s not an improvement. I said it’s not enough of an improvement.

 

[lindseym1013]

@pedrito Yeah which is why everyone’s giving you shit, catch up

 

[pedrito]

@lindseym1013 checks comments

By everyone, do you mean you?

 

[lindseym1013]

@pedrito How many are agreeing with you?

 

[sabby54]

@pedrito You’re fighting a straw man there. Who is saying the RBA is going to drop rates?

 

[pedrito]

@sabby54 It’s the broadly held consensus that rates will be cut this year. It’s spruiked on this sub on a regular basis as well as by the media and economists.

 

[sabby54]

@pedrito They are predicting rates will be cut in the second half of the year, not that they will be cut based on 2023 CPI data.

CPI should fall within the target range by mid-year, perhaps as soon as this quarter. That’s when cuts will come into play. What happened last year won’t be relevant by then.

No one is predicting imminent cuts based on the data we have to date.

 

[pedrito]

@sabby54 I’m not sure I follow… if they’re predicting cuts, what are they basing the prediction off? Predominantly inflation, right? I can’t imagine the RBA would cut rates if inflation wasn’t looking promising.

For CPI to fall within the 2-3% range next quarter, the Q1 quarterly change would need to 0.3%, which is obviously very low. It would be great if it did, because that would mean inflation very likely is under control, but I’m just not optimistic about it. Historically, Q1 has seen higher growth than Q4.

 

[sabby54]

@pedrito It only needs to be about 0.4% to hit 3%, that’s not that low compared to pre-Covid figures. 0.2% Mar-15, -0.2% Mar-16, 0.5% Mar-17, 0.4% Mar-18, 0% Mar-19, 0.3% Mar-20.

I think it’s more likely to happen in Q2, but Q1 is certainly plausible given how quickly the economy is cooling and the rate at which inflation is dropping. At a monthly level we are already down to 3.4% in December.

Going back 10 years QtoQ inflation has only been higher in Q1 than the preceding Q4 in one year - 2022 as inflation was taking off. So I’m not sure where you got the impression Q1 is historically worse for inflation.

 

[pedrito]

@sabby54 My numbers went back to 2000. Between 2000-2010, there were only 2 years where Q4 was higher than Q1. Between 2010 and 2020 Q1 was generally higher than Q4, albeit by a very small margin.

Don’t get me wrong, Q1 may come in very low. I’m just not optimistic about it.

The monthly data look good because Nov22 and Dec22 dropped off the YoY calc, and those two months were extremely high MoM increases.

 

[sabby54]

@pedrito Well Jan23 to Mar23 all had very high YoY inflation so by that logic you’d expect Q1 inflation to drop off too?

I think you are being overly pessimistic. Whatever way you cut the data, the most likely outcome is lower inflation this quarter than last, probably somewhere either side of 3%.

It’s possible that inflation remains higher but there’s not really any data to suggest that is likely. I think your expectations are flipped from where logic suggests they should be.

 

[pedrito]

@sabby54 I do agree that I’m being very pessimistic (stated so in my OP!).

I’m expecting the Q1 data to show mid to high 3’s personally. And then I’m expecting it to remain in the 3’s for the remainder of the year.

But I’m happy to be wrong. I’d love a rate cut so that I can loosen my belt, I just won’t get my hopes up.

 

[resjudicata]

@pedrito I'm not sure it makes sense to average a quarterly percentage change.