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Australia & New Zealand Weekly: Inflation Expectations Might be Anchored Despite the Official 2.5% Policy Target

Week beginning 20 August 2018

  • Inflation expectations might be anchored despite the official 2.5% target.
  • RBA: Minutes, Governor Lowe and Deputy Governor Debelle speak.
  • Australia: Westpac-MI Leading Index, construction work.
  • NZ: real retail sales.
  • US: Fed Chair Powell speaks at the Jackson Hole Symposium, durable goods orders.
  • Flash Markit PMI’s for Japan, the Euro Area and the US.
  • US-China trade discussion and scheduled implementation of 2nd round tariffs.
  • Key economic & financial forecasts.

Information contained in this report current as at 17 August 2018.

Inflation Expectations Might be Anchored Despite the Official 2.5% Policy Target

Last week the Reserve Bank surprised by lowering its inflation forecasts for 2018 (both underlying and headline).

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Headline was lowered from 2.25% to 1.75% and underlying was lowered from 2% to 1.75%.

If correct, that means underlying inflation will have printed below the bottom of the 2-3% target range for three calendar years in a row. Headline inflation will have printed below the bottom of the 2-3% target for five calendar years in a row.

Economists and policy makers generally focus on underlying inflation when assessing the meaning of the “signal” from any inflation print. That is appropriate because the underlying measure “trims out” any large “one off” movements that might be misinterpreted.

However,