Australia February Monthly CPI Indicator

The Monthly CPI indicator rose 6.8% in the year to February, compared with the Westpac forecast of 7.4% year-on-year and the market forecast of 7.2% year-on-year. This represents a significant downside risk to our March forecast CPI forecast of 1.5% per quarter.

Specifically, the index rose only 0.2% in February versus our forecast of 0.8%; we believe the market median would have been about 0.6% given the 7.2% annual forecast. Compared with the average monthly increase of 0.9%mth in the last three months of 2022, the first two prints of 2023 represent a significant slowdown in inflation: -0.4% in January and 0.2% in February.

The monthly CPI indicator can fluctuate widely from month to month, as it is not a true monthly index, but rather the publication of data from the quarterly CPI, as they become available. This volatility is due to the timing of the various price surveys. This could be the reason why ABS reports the annual growth rate and not the monthly change.

Taken together, the monthly indicators for January and February represent a significant downside risk to our current forecast of a 1.5%qtr increase in the March quarter CPI. To achieve this forecast, the monthly CPI indicator would have to rise by about 1.5% to 1.6% in March.

The major contributors to the annual increase in February: housing (9.9% y/y), food and nonalcoholic beverages (8.0% y/y), transportation (5.6% y/y), and leisure and culture (6.4% y/y).

The ABS noted that the annual increase for the housing group was lower in February (+9.9) than in January (10.4%). New apartments grew 13.0% year-over-year in February, the slowest annual growth since February 2022, as price inflation for building materials continues to ease along with moderate demand. Rents rose again due to the tight rental market, holding steady at 4.8% y/y.

For the month, housing costs increased 0.3% due to a 0.7% increase in rents, a 0.2% increase in new construction housing, and stagnant electricity prices. The website ABS continues to improve the monthly indicator CPI and seems to add a new series every month. In February, it was electricity, which shows a 17.2% year-on-year increase in electricity prices. The ABS notes that the full impact of the July 2022 annual price review took time to reach many households, as electricity rebates reduced electricity bills in WA, ACT, Qld and Tasmania between July and December last year.

Motor vehicle fuel prices rose 5.6% year-on-year, lower than the 7.5% increase in January. While fuel prices were responsible for the increase in the transportation sector, annual fuel inflation is the lowest it has been in two years. This month, transportation prices rose by 1.8%, while fuel prices increased by 4.1%.

The biggest negative surprise for us was the 14.6% decline in holiday travel in February. We had expected a 6.0% decline for the month. This doubled the decline in leisure and culture from our forecast of 3.1%mth decline to -6.0% for the month. Although we expect some turnaround in March, history tells us we should not expect this to offset the 9% decline in Leisure and Culture in the first two months of 2023.