Inflation rose slightly slower than expected in 2Q2018 by 2.1% y/y from 1.9% y/y in 1Q2018 (vs. consensus of 2.2%). Meanwhile, core inflation in 2Q2018 grew by 1.9% y/y. We feel there is little excitement in this reading since there is little pulse on inflationary pressure coming from the demand-side despite the above-trend headline GDP at an enviable 3.1%.

While the volatile headline figure is now at the bottom end of the Reserve Bank’s 2%-3% band, its preferred measure of underlying inflation came in below the target at 1.9%. Hence, we are not expecting the RBA to lift its cash rate of 1.5% until late 3Q2019 or in 4Q2019.

• Inflation rose slightly slower than expected in 2Q2018 by 2.1% y/y from 1.9% y/y in 1Q2018 (vs. consensus of 2.2%). Meanwhile, core inflation in 2Q2018 grew by 1.9%y/y, the same pace as in 1Q2018. This brings the 1H2018 headline inflation to average at 2.0% and core inflation at 1.9% y/y.

• We feel there is little excitement in this reading. There is a weak pulse of inflationary pressure from demand-side pressures in the economy despite above-trend headline GDP at an enviable 3.1%, which is driven largely by the rapid expansion of the population.

• While the volatile headline figure is now at the bottom end of the Reserve Bank of Australia's 2%–3% band, its preferred measure of underlying inflation came in below the target at 1.9%.

• Hence, we are not expecting the RBA to lift its cash rate of 1.5% until late 3Q2019 or in 4Q2019. Also with household income still weak and the growth in the overall wages yet to be broad-based amid the ongoing spare capacity in the labour market, we foresee inflation growing moderately.

• In addition, with the central bank’s acknowledgement of a trade war threat amid the current high household debt which sits at 121.7% of GDP as of 2017, a full-blown trade war can jeopardize the RBA’s goal of keeping its economy growth at sustainable pace. On that note, we remain cautious on our inflation projection at 2018 at 2.2%.

Source: AmInvest Research - 26 Jul 2018