A likely "material upward revision" to the RBA's inflation outlook

The big forecast miss on Q3 inflation risks a slower return of inflation to target
Kieran Davies

Coolabah Capital

The RBA's big forecast miss on underlying inflation in Q3 risks the slower return of inflation to target that the RBA board warned against. 

Yesterday's inflation numbers came in higher than the RBA had expected, with annual underlying inflation of 5.2% exceeding the RBA's August forecast of about 4.8%, suggesting that the RBA should raise rates next month. 

Comparing this 0.4pp forecast miss with history, it represents the equal third-largest error since the RBA started forecasting underlying inflation in the early 1990s (there are ten times the error has been this large over this time). 

The current-quarter forecast miss matters because it is positively correlated with forecast revisions to the RBA’s inflation outlook in the subsequent Statement on Monetary Policy. 

Based on the relationship between the current-quarter forecast miss and the RBA's inflation outlook over the period from 2010 to 2023, the 0.4pp forecast error in Q3 would ordinarily see the RBA raise both its year-ahead and year-and-a-half-ahead forecasts for underlying inflation by about 0.2pp. 

This raises the possibility of a "material upward revision" to the outlook, in that - pending a further rate hike - it could see the RBA revise its forecast profile for underlying inflation in 2025 from 2.8-2.9% to 3.0-3.1% in the November Statement on Monetary Policy.

If that happened, it would represent the slower return to the inflation target that the board warned against in the minutes of the October monetary policy meeting.       

The RBA had a "material" forecast miss on underlying inflation in Q3 2023
The RBA had a "material" forecast miss on underlying inflation in Q3 2023


History suggests that current-quarter forecast misses trigger revisions to the RBA's forecast outlook
History suggests that current-quarter forecast misses trigger revisions to the RBA's forecast outlook
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Kieran Davies
Chief Macro Strategist
Coolabah Capital

Based in Sydney, Kieran Davies is Chief Macro Strategist at Coolabah Capital Investments, an asset manager with 40 executives and over $8 billion in fixed-income strategies. Kieran is responsible for macroeconomic research and investment strategy,...

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