Commodity prices indicate a rebound in Australian inflation

Over the past five years, inflation has been slowing in Australia despite relatively strong employment and GDP. Many forecasters had expected a falling Australian dollar to lead to higher inflation; however, this has not been the case. In our view, the reason for this is that the real driver of inflation in Australia has been lower commodity prices as the economy transitions away from the mining boom. If the recent stabilisation in commodity prices can continue, then this would suggest the low point for inflation could be closer than expected. While inflation will likely remain low for some time, this recent stabilisation means that the risk of inflation falling below 1% is reduced. In our view, it is now more likely that it will rebound higher, albeit moderately, over the next six months. For investors, this could offer a potentially cheap entry into the inflation-linked market should sentiment change. (VIEW LINK)