Photographer: Brendon Thorne/Bloomberg

How Australian Inflation Forecasts Could Go Up in Smoke

A planned shake up of Australia’s consumer price index could result in a significant paring of inflation expectations.

Westpac Banking Corp. economist Justin Smirk has run the numbers on how the statistics bureau could revise its inflation basket to bring it up to speed with the latest spending patterns and technological changes. Using its estimate for the weights revision, Westpac found that 0.4 percentage point could be shaved off its inflation forecast by the fourth quarter of 2018, while the core inflation forecast may drop by 0.3 percentage point.

Much of it could come down to tobacco. If its weighting is cut from Westpac’s implicit estimate for December 2017 (before-re-weighting) of 4.2 percent to 2.5 percent, the impact could be significant. Smirk points out that their estimate will be updated once details of the revision are known.

Lower core inflation could keep benchmark rates in a holding pattern for even longer than the market anticipates.

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