A preview of the Australian Q4 2014 CPI inflation report due on 28 January 2015, the market will be focused on both the headline and trimmed mean measures.

The report is due at 0030GMT.

First, what is expected?

  • The ‘expected’ (i.e. the consensus expectation from the Bloomberg survey of analysts providing forecasts) is 0.3% q/q (and 1.8% y/y)
  • prior was 0.5% q/q (and 2.3% y/y)

For the trimmed mean

  • expected is 0.5% q/q (and 2.2% y/y)
  • prior was 0.4% q/q (and 2.5% y/y)

For the weighted mean

  • expected is 0.5% q/q (and 2.2% y/y)
  • prior was 0.6% q/q (and 2.6% y/y)

Its worth noting for the release today that a high inflation reading for Q4 of 2014 is going to drop out of the y/y reading. Have a look at this graph (scroll down the page a little) showing past CPI data and note the strong reading in December 2014 of +0.9% q/q. This reading is going to drop out of the headline y/y result today, lowering the reading (obviously I am assuming today’s result isn’t going to be a strong print, if it is it would negate the impact of the high 0.9% q/q reading from December 2014 dropping out!).

Also, take a look at the TD Securities/Melbourne Institute (MI) Inflation Gauge results since the previous Australian Bureau of Statistics CPI release (we get the official data from the bureau only four times a year, while the TD/MI gauge comes out monthly):

December 2014:

  • headline flat at 0.0% q/q, 1.5% y/y
  • trimmed mean at 0.1% q/q, 1.7% y/y

November 2014:

  • headline 0.1% q/q, 2.2% y/y
  • trimmed mean at 0.1% q/q, 2.4% y/y

October 2014:

All of this points to a low inflation print today.

Also pointing to a low result are:

  • The falling prices of fruit & vegetable
  • Falling oil prices (resulting in lower petrol prices)

While, on the other hand

  • We may see increases in prices of imports and import-competing goods due to the lower Australia dollar (these price increases may well be subdued due to soft demand and retail competition)
  • Higher prices for housing (rents & house purchases) and tobacco (an increase in excise) and recreation (seasonal rise in domestic airfares)

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Today’s CPI data is a key market focus heading into the Reserve Bank of Australia meeting on February 3. There are some (not many) expectations of a rate cut from the RBA at this February meeting (expectations are higher for a March cut), it is a ‘live’ meeting. I think a February cut is unlikely, but what is more likely is a change in language from the RBA toward an easing bias, this is usually the process the RBA follows before changing rates (usually … but it isn’t beyond central banks to surprise us … see the recent Bank of Canada decision … and … errr … some of you may recall the surprise from the Swiss National Bank a couple of weeks back? …)

Of course, the data today is for inflation in the past, and we shouldn’t forget that while this is important the RBA will also consider their expectations for inflation going forward. A “soft inflation outcome … coupled with downward revisions to inflation forecasts could provide the RBA with scope to lower the cash rate”… soft inflation “would give a positive spin to a rate cut, rather than a negative one”.

A low print for the CPI today will add to the case for a rate cut (at the margin) and should continue to pressure the Australian dollar lower. A higher reading than expected would be the greater surprise side, should that occur we would be very likley to see a sharp AUD gain. I’m writing this preview a little ahead of time, so I’ll come back with key levels for the AUD/USD soon.