Even a bottom-up stock picker would probably be aware of the macro focus on inflation over the last three months.

All the chatter has been around US inflation, after monthly data prints beat expectations throughout the June quarter.

So far, markets have digested the news and look to be taking the view that inflationary forces will prove transitory.

But while inflation is front and centre, Australia joins the party this morning when Q2 CPI data comes out at 11:30am EST.

Unlike US data, Australian inflation only comes out once a quarter so this will mark the first update since April.

And in research last week, CBA economist Gareth Aird provided a framework of what to watch for.

CPI — Australian edition

As a macro indicator, inflation trends are worth watching for stock investors because they are the central input in the outlook for interest rates.

And Aird says Australia is set to follow the path of the US, where strong employment figures and supply-side bottlenecks combine to push inflation higher through the middle of the year.

“Our forecast is for the headline CPI to increase by 0.7% in Q2 21, which would see the annual rate spike to 3.8%,” Aird said.

In annual terms the inflation figure is coming off a low base, after the economy fell into deflation in Q2 2020.

While the headline gauge is one measure, Aird also made a forecast for trimmed mean inflation — which CBA says is a more useful gauge for underlying inflationary forces.

On that front, the bank forecasts a 0.5% quarterly gain flowing through to annual CPI growth of 1.6% (or 1.7% in six-month annualised terms which “better captures the inflationary pulse”), Aird said.

However, “the risk lies with a stronger print, particularly on the core measure”, Aird said.

Among inflation components, he highlighted the potential impact of housing, which got a slightly higher re-weighting (to 24%) of the CPI basket in the last round of annual changes.

Building and renovation costs, rent, and utilities charges all may see upward rates of change in the June quarter, accompanying the booming growth in post-Covid real estate prices.

Market response

Aird noted that the RBA’s current forecast is for quarterly inflation growth of 0.2%, leaving the annual rate of change at 3.25%.

In that context, CBA’s quarterly forecast is “quite a bit stronger”.

“That said, near term monetary policy decisions will be linked to the COVID-19 situation and any upside surprise on the CPI is unlikely to feature in the Board’s August policy deliberations,” Aird said.

CBA now expects the RBA to dial back the taper plans for its bond-buying program. In addition, Aird and the economics team have flagged that their call for a late-2022 rate hike may have to be changed if greater Sydney continues losing the battle in its attempts to reign in the Delta variant.

In separate analysis, CBA rates strategists Martin Whetton and Phillip Brown noted the Q2 CPI print in research earlier this week, but said “the risk is markets look past it”.

On bond markets — which play a key role in pricing inflation expectations — “the impact of half the country being ‘in the freezer'” has already started to impact bond prices, the pair said.

So while it can be expected that Australian inflation will jump in the June quarter, it may take a major upside surprise to prompt a material reaction across asset classes.