Today is a huge one, with the June quarter Consumer Price Index released that not only will tell us if inflation is falling, but (more importantly) will indicate whether the Reserve Bank will keep interest rates on pause. The good news is that economists (who feverishly look at all good predictors of price rises and falls) expect the inflation rate to drop. But will the drop be enough to stop Dr Phil Lowe giving us one more rate rise before he hits the road?

Westpac’s Justin Smirk is one of those economists watching prices like a Labrador eye off a sausage at a barbecue. Here are his main predictions: “Westpac is forecasting a 1.1% rise in the June quarter taking the annual pace down 0.7 of a percentage point to 6.3% a year from 7% a year. We believe that December was the peak for annual inflation in this cycle and the pace is expected to continue to moderate from here.”

He says the main reason for a further step down from the 1.9% CPI rise reading in the first quarter and the 1.4% print in the December quarter last year, has been the drop in housing costs.

The moderation in housing inflation is due to state government rebates driving down electricity prices
in the quarter.

I don’t want to get into pre-inflation data speculation about what the fall will be because there are so many curve balls that can make economists’ predictions unreliable, but I do want to guess what kind of result we need to see today to stop the RBA going for another rate rise next Tuesday.

Personally, I think the RBA has done enough. When the mortgage cliff really kicks in as the second half of this year unfolds, those past 12 rate rises will get the bang that has yet to be felt by the 40 per cent of borrowers who’ve been on low fixed rate home loans.

As I’ve said, Westpac predicts the inflation rate will be down to 6.3% from 7% in the year to the end of the March quarter, while the CBA’s economics team is tipping 6.2%, but the monthly number is more promising.

The Australian Bureau of Statistics will also release the June monthly number, which is added to the 11 previous months’ readings to give the annual inflation result. “The monthly CPI indicator is also scheduled with the annual pace expected to slip from 5.6% in May to 5.4% in June,” CommSec’s Craig James revealed.

I can’t tap into my usual well of optimism and confidently predict that inflation will have fallen enough to get the RBA to back off on its crusade to kill the inflation dragon. Why? Well, unemployment isn’t rising strongly enough, and house prices are not falling, they’re rising. So conventional economics says the rate rises haven’t stopped consumer spending enough to see those who set prices cut their prices to bring inflation down big time to make the RBA say: “Our rate rises are doing the trick.”

Last week I showed that the US also hasn’t seen unemployment spike but still has recorded a 3% inflation number, which surprised economists. And the Yank’s unemployment curve resembles ours — see below.

Two charts instead of one are worth thinking about.

US unemployment

Australia unemployment

I’m not being a professional economist here, but I am being a long-time watcher of the RBA. If we can get an inflation reading with a 5%+ number, it could make the RBA stay on pause. If it’s a 6% reading, I reckon rate rise worriers will have to keep worrying!