Cliff Notes: A Fork in the Road

Key insights from the week that was.

In Australia, February’s CPI came in slightly below expectations, headline inflation ticking down to 3.7%yr from 3.8%yr, while trimmed mean inflation held steady at 3.3%yr. Constructive elements of the detail included: dwelling purchases posting its smallest increase in ten months; a below-expectations annual increase in education prices; and lower childcare costs, the result of increased take-up of the Childcare Subsidy following the introduction of the three-day guarantee. There were also a couple of upside surprises, however, most notable were clothing and some food-related categories. The impact from electricity rebates has also now abated, bringing reported electricity prices back into line with actual prices.

The net result is that the inflationary pulse Australia was experiencing prior to the current surge in fuel prices was marginally softer than expected. While fuel will undoubtedly boost headline inflation from March, the trimmed mean pulse is likely to hold above but near the top of the target range through 2026. For a detailed view of how each state’s economy is positioned to weather coming headwinds, see our latest Coast-to-Coast report.

The Q1 Westpac-ACCI Survey of Industrial Trends meanwhile showed that the long-awaited improvement in manufacturing conditions is finally materialising, the Actual Composite rising to 59.3 – a strong expansionary read. Underpinning the move was a surge in output growth, another solid lift in new orders and, encouragingly, a rise in employment and overtime. Note though, this survey was largely completed before the onset of the Middle East conflict. Australian manufacturing’s acute exposure to fuel and energy costs is likely to see a partial reversal in Q2 and a degree of apprehension over the outlook.

Offshore, data released was inconsequential. The preliminary March S&P Global PMIs for the major advanced economies unsurprisingly pointed to softer momentum and heightened inflationary pressures in the initial weeks of the Middle East conflict. FOMC members Bowman and Waller meanwhile were focused more on labour market weakness than inflation, though they felt it prudent to wait-a-while to assess the implications of the current conflict for price risks.

Regarding the state of the Middle East conflict, equity markets took solace in news the White House had been involved in initial intermediated discussions over the path to a ceasefire, although uncertainty over who in Iran’s leadership will take the lead in any formal negotiations has kept participants guessing on both the timing and potential success of these initiatives. The overnight extension of the 5-day reprieve for Iranian energy infrastructure by President Trump to 10 days is a positive step towards fruitful negotiations, however.

Iran’s military actions have also been relatively contained this week, and safe passage through the Strait of Hormuz has been provided to several ships, consistent with prior communications from Iranian officials that ships operated by countries not involved in the conflict are free to transit if Iran’s conditions are met. It is not clear if this includes a payment of up to US$2 million per shipment as previously telegraphed. If Iranian authorities hold to this guidance, China’s fleet and vessels from other non-aligned countries such as Malaysia (a key supplier to Australia who reportedly reached an agreement with Iran overnight) could slowly reduce the current global deficiency in crude and LNG supply, even if the US/Israel and Iran continue military actions against one another. The key risk remains the intentional, or unintentional, destruction of production and/or logistics facilities, turning a temporary loss of supply into an enduring one. The duration of this conflict and lost supply matters a great deal to both the persistence of global consumer inflation and the policy outlook.