A likely "material upward revision" to the RBA's inflation outlook
The big forecast miss on Q3 inflation risks a slower return of inflation to target
The RBA's big forecast miss on underlying inflation in Q3 risks the slower return of inflation to target that the RBA board warned against.
Yesterday's inflation numbers came in higher than the RBA had expected, with annual underlying inflation of 5.2% exceeding the RBA's August forecast of about 4.8%, suggesting that the RBA should raise rates next month.
Comparing this 0.4pp forecast miss with history, it represents the equal third-largest error since the RBA started forecasting underlying inflation in the early 1990s (there are ten times the error has been this large over this time).
The current-quarter forecast miss matters because it is positively correlated with forecast revisions to the RBA’s inflation outlook in the subsequent Statement on Monetary Policy.
Based on the relationship between the current-quarter forecast miss and the RBA's inflation outlook over the period from 2010 to 2023, the 0.4pp forecast error in Q3 would ordinarily see the RBA raise both its year-ahead and year-and-a-half-ahead forecasts for underlying inflation by about 0.2pp.
This raises the possibility of a "material upward revision" to the outlook, in that - pending a further rate hike - it could see the RBA revise its forecast profile for underlying inflation in 2025 from 2.8-2.9% to 3.0-3.1% in the November Statement on Monetary Policy.
If that happened, it would represent the slower return to the inflation target that the board warned against in the minutes of the October monetary policy meeting.
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Based in Sydney, Kieran Davies is Chief Macro Strategist at Coolabah Capital Investments, an asset manager with 40 executives and over $8 billion in fixed-income strategies. Kieran is responsible for macroeconomic research and investment strategy, contributing to the investment decisions of the firm. Kieran has long experience as a macroeconomist in both the private and public sectors. He has worked most recently as Chief Markets Economist for National Australia Bank and was previously Chief Economist, Australia and New Zealand, for Barclays Bank and ABN Amro Bank/RBS. Kieran also worked as Principal Adviser on the macroeconomy and budget policy in the Commonwealth Treasury and Director of Forecasting.
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Based in Sydney, Kieran Davies is Chief Macro Strategist at Coolabah Capital Investments, an asset manager with 40 executives and over $8 billion in fixed-income strategies. Kieran is responsible for macroeconomic research and investment strategy,...
Based in Sydney, Kieran Davies is Chief Macro Strategist at Coolabah Capital Investments, an asset manager with 40 executives and over $8 billion in fixed-income strategies. Kieran is responsible for macroeconomic research and investment strategy,...
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