Brace (But Not Too Much) for the CPI Roller-Coaster

Hang on to your hat. There is a better-than-even chance that Australia’s second-quarter CPI figure will surprise on the upside—possibly by a lot. In “normal” times, this would almost certainly trigger fears that the Reserve Bank of Australia (RBA) would bring forward its guidance on the timing of a rate rise.

But times are not “normal”. One acknowledgement of that is the RBA’s statements that it is focusing on inflation outcomes rather than, as is more usually the case, the inflation outlook. But surely a big CPI number—an “outcome” above the target band—would cause the RBA to change its position that a rise in the cash rate is unlikely before 2024?

Probably not, in our view, once three interacting factors are considered: the risks to the near-term economic outlook, the dynamics underlying the CPI figure, and the shift in monetary policy regime.


Australia’s better-than-expected economic performance since the pandemic began has been grist to the mill for those who think tighter policy could be on the cards. Economic data has been much stronger than expected. The nemployment rate is below 5% and the second-quarter GDP result, when released, will more than likely strengthen such views.

But it will be a snapshot of the economy before the Delta variant took hold, and won’t account for the economic impact of the latest wave of lockdowns.

There are reasons to think that the economy may not do so well this time. While the first wave of COVID-19 was a huge challenge for Victoria, resulting in extended lockdowns, the rest of the country fared relatively well, with a lower spread of infections and more limited lockdowns.

Government response in terms of JobKeeper and other support measures was swift and generous.

With the Delta variant, however, more of the country has been locked down and government support (so far) has been less forthcoming than it was during the first wave. Lockdowns look set to continue for the immediate future, putting the short-term economic outlook under a cloud.