The Path to 3%
The RBA has moved to monthly CPI reporting, which is making forecasting a bit more fun for me as more granular data means you can work out which months are dropping out and what needs to happen to see for the annualised inflation rate to fall/rise.
To get back to target (let's call it 3%), the below needs to happen:
- To hit 3% annual inflation by March 2026, monthly prints need to average −0.02%. Deflation lol.
- To hit 3% by June, need 0.05% per month. Achievable I guess, but that's effectively flat/no inflation for six straight months.
- To hit 3% by December 2026, need 0.25% per month. That's a normal month in a 3% inflation world which I think is entirely achievable, especially with base effects helping in the second half of the year.
Trying to get to 3% by March is cooked because the Dec-25 spike pushed the index to 100.97. For March 2026 to print 3.0% YoY, the index needs to be 100.90, meaning the only path to 3% by March is three months of price declines. Yeah the price of petrol is helping (for now), but insurance and housing costs have continued to run higher.
March therefore is locked in around 3.5%–3.8% unless something utterly breaks. And likewise, June seems to be pinned around 3.8% annualised too.
December 2026 at 3% is achievable.
Predicting Inflation
No idea, if you think you have insight, so does a dart board.
But, we have data to work with, and the answer clearly is that before you give into the AFR doom headlines, it is mathematically challenging for inflation to drop below 3.8% through to June. Possible but we need some really helpful data.
One might even expect that towards the end of July when we get the June inflation data, that the concept of persistent Inflation is going to become a prevalent discussion point. This means by mid-July, if inflation stays around that 3.5%–3.8% range (highly likely), everyone is going to call the RBA fools and call for further hikes. There is a non-zero chance that an additional rate hike get priced into markets by the middle of the year in my view.
Will they hike or not? Who knows who cares but the data in the second half of the year is very supportive to inflation coming back towards the 3% target.
A chart to visualise below. 3% average inflation takes us through to over 3.5% inflation by the end of the year.
The headline figure in my view is not going below 3% until 2027 guys, buckle up.
Inflation - Bonus thought
There is a concept we haven't discussed for a long long time because the West coast has been down in the dumps, but commodities are booming and Perth is printing money again. The old conversation of Australia having a 2-speed economy is going to kick in at some point. A mining boom combined with an (insert your reason) East coast economic slowdown.
We have forgotten what that is like, but Australia makes money in the West and we rely on migration to grow in the East. With immigration likely slowing down significantly from here, the RBA is going to remain challenged balancing the economy.
And unlike times of past, social media influence is a much bigger, meaning this will take a life of its own. Did you know "The Dominion League" won the 1933 WA Secession Referendum with a 2/3 Yes vote? Constitutionally unfeasible but the popularity was there.
When does the 2-speed economy strike?