Downside risk to the December quarter CPI: Westpac's Justin Smirk
Recent history suggests downside risk to the December quarter CPI but due to forecast bias. Also we note there is no clear relationship between the Australian and NZ CPI.
As we noted in our preview, 'Australian Q4 CPI preview' there are clear downside risks to the December quarter CPI.
Sept Qtr CPI: 0.6%qtr
Dec Qtr CPI forecasts; WBC f/c: 0.8%qtr, Mkt f/c: 0.7%qtr, Range: 0.4%qtr to 1.4%qtr
Through the last four quarters Australian forecasters have overestimated the quarterly rise in the CPI by just under 0.2ppts (average of 0.175 at three decimal places).
It appears that Australian forecasters have been slow to react to the disinflationary pulse that has hit the economy for at least a year now. With a median forecast of 0.7%qtr for the December quarter, there is a clear risk that the CPI will undershoot expectations yet again.
Westpac has left its quarterly forecast for the CPI at 0.8%qtr as that is the best estimate we can get from the partials we have even when we allow for some further disinflationary pressure in consumer goods space.
However, in our mind the risks are asymmetric to the downside.
But what of the New Zealand CPI? Didn’t the December print come in at 0.1%qtr against a median expectation of 0.4%qtr? Doesn’t that highlight a significant downside risk to the Australian CPI?
Our research suggests there is very little correlation in the quarterly change in the NZ CPI and the Australian CPI. Nor is there any correlation between the forecasting errors for the NZ and Australian CPIs.
So while the ongoing disinflationary pressure in the Australian economy points to a downside risk to both Westpac’s and the market's forecast for the December quarter CPI, we would caution against using the New Zealand CPI as an argument.
Justin Smirk is senior economist, Westpac Group and can be contacted here.