Peering below the surface
Topline data, on their own, can mislead. It pays to look below the surface to see the underlying trend.
- Headline data can sometimes mislead. One needs to delve into the detail to get the full story. Headline inflation was softer than expected in April, but underlying trends told a different story. Likewise, employment growth was weak in the month, but this was mostly seasonal and hours worked told a different story. Productivity growth is also likely to have been weak in Q1; again, business investment data give reason not to despair about the trend.
- The RBA has the knowledge and resources to delve into the detail and not be misled by the surface figures. It is clearly concerned about the possibility that the energy price shock will pass through to other prices at scale, keeping inflation high. New detailed datasets have become available that allow its staff to quantify some important relationships more accurately.
- The economy is a complicated thing, though, and it is possible that the RBA’s analysis of the outlook is missing some important trends and relationships. Structural change is especially hard to grapple with. Shifts in labour market trends and the consequences of the data centre boom might be being misunderstood, though hopefully not for long.
Recent data have tended to tell a different story than the headline figures would suggest. Headline inflation was soft in April, but underlying measures were still too high and, if anything, still drifting up. Employment was even weaker than seasonal patterns implied in the month, but the hours worked data told the opposite story. And productivity growth is likely to be reported to have been weak in the March quarter, but this is partly because much data centre investment is in the build phase, and will only add to GDP and productivity later.
These contrasts are all examples of why one can be misled by focusing on a few headline figures. Accurately assessing the state of the economy requires a considered view of the whole picture. There is no substitute for delving into all the data detail.
In doing so, one must also guard against seizing on the data detail that fits your preferred narrative. For example, we remain concerned that pass-through of fuel prices to the prices of other goods and services will be extensive, and we are seeing some evidence of pass-through in homebuilding costs and hospitality already in the April CPI. It is nonetheless also true that pass-through has so far been a bit less than we feared.
The RBA understands the subtleties of Australia’s economic data and has the resources to look below the surface properly. It will not jump to rash conclusions based on headline numbers. It will, however, want to take a pause to assess how dominant and lasting these below-the-surface trends will be.
To the extent that we can glean anything from the RBA’s latest communications, it is that – like us – they are worried about second-stage pass-through of energy costs. Recent research, which was presented to the May meeting of the Monetary Policy Board and discussed in a subsequent speech by the RBA’s chief economist, highlights that pass-through is larger and faster following a large shock than after a small one.
This is not exactly a new result. The RBA has known that the “Phillips curve” relationship between inflation and labour market slack is nonlinear for about three decades. Their main whole-economy model incorporates this nonlinearity, though it does not seem to be in the model used in the speech to highlight the different behaviour of inflation that it implies. And the linkage of this nonlinear relationship to the size of the shock is an implication of so-called “menu cost” models that has been known to other central banks for at least 20 years, both in theory and in other countries’ data, though this link wasn’t recognised when the original RBA nonlinearity paper was published.
Quantifying this effect accurately arguably had to wait until the dataset used in the recent research paper became available. The 1990s-era empirical result means it is nonetheless unlikely that the RBA’s existing forecasting framework would have entirely missed faster pass-through of larger supply shocks, even if the theory behind it was not fully recognised at the time. But the recent communication does speak to the balance of risks that the RBA perceives.
It is possible, though, that the RBA’s current analysis misses some other trends under the surface.
As highlighted by Westpac Economics colleague Ryan Wells’ note yesterday, as best as we can tell, official family forecasters’ views about the outlook for labour supply have diverged. Commonwealth Treasury shares our view that the underlying trend in the participation rate is up. This is a departure from its longstanding assumption that population ageing shrinks the workforce. As we have been highlighting for a while, the opposite is true in Australia and most other advanced economies. By contrast, the RBA’s forecast is for a flat participation rate this year and a decline next year as job opportunities diminish. The labour demand effect is assumed to dominate.
To be fair, Assistant Governor Hunter’s speech did acknowledge that extra labour supply is a possible response to cost-of-living pressures, citing a recent IMF working paper that used Australian data to show this. But they acknowledge it only as a risk, not as their base case. It is also a cyclical factor, not the underlying trend discussed above. Past RBA communication has acknowledged this upward trend, but the latest Statement on Monetary Policy did not mention it. As Ryan commented in his note, the labour demand effect will have to work hard to offset this trend and generate the decline the RBA assumes.
(As an aside, I find it interesting that this paper was released as an IMF Working Paper and not an RBA Research Discussion Paper. Yes, three of the authors are from the IMF, but one is the deputy head of the RBA’s Economic Research department and likely the only one authorised to access the detailed tax and Census linked dataset directly. Likewise, it is interesting that the speech cited the paper in the context of cost-of-living pressures, not the – admittedly small at a macro level – positive labour supply response to monetary policy that the paper focused on.)
It is also possible that the RBA’s forecasting framework has not fully absorbed the implications of the build phase of the AI boom. Capex data released recently shows a huge contribution from data centres and IT investment more broadly – bigger than even our top-of-market expectation. Business investment will be strong, but as Westpac Economics colleague Pat Bustamante points out today, the imported component is very large, especially in the fit-out stage. A fixed view of potential growth in supply capacity will interpret this growth as adding to capacity pressures, even though it is literally building capacity. And like the mining investment boom, the build phase actually drags on measured productivity, as workers labour to build capital stock that is not yet producing anything.
Will a weak outcome for measured labour productivity in Q1 nudge the RBA to become even gloomier about ongoing productivity trends, even though it is likely a temporary lag?
Let’s hope the team at the RBA remember to look below the surface.
Stay informed with Westpac IQ
Get the latest reports straight to your inbox.
Related articles
Australia and NZ Weekly 1 June 2026
Datacentres hyperscale capex growth
Browse topics
Disclaimer
©2026 Westpac Banking Corporation ABN 33 007 457 141 (including where acting under any of its Westpac, St George, Bank of Melbourne or BankSA brands, collectively, “Westpac”). References to the “Westpac Group” are to Westpac and its subsidiaries and includes the directors, employees and representatives of Westpac and its subsidiaries.
Things you should know
We respect your privacy: You can view the New Zealand Privacy Policy here, or the Australian Group Privacy Statement here. Each time someone visits our site, data is captured so that we can accurately evaluate the quality of our content and make improvements for you. We may at times use technology to capture data about you to help us to better understand you and your needs, including potentially for the purposes of assessing your individual reading habits and interests to allow us to provide suggestions regarding other reading material which may be suitable for you.
This information, unless specifically indicated otherwise, is under copyright of the Westpac Group. None of the material, nor its contents, nor any copy of it, may be altered in any way, transmitted to, copied of distributed to any other party without the prior written permission of the Westpac Group.
Disclaimer
This information has been prepared by Westpac and is intended for information purposes only. It is not intended to reflect any recommendation or financial advice and investment decisions should not be based on it. This information does not constitute an offer, a solicitation of an offer, or an inducement to subscribe for, purchase or sell any financial instrument or to enter into a legally binding contract. To the extent that this information contains any general advice, it has been prepared without taking into account your objectives, financial situation or needs and before acting on it you should consider the appropriateness of the advice. Certain types of transactions, including those involving futures, options and high yield securities give rise to substantial risk and are not suitable for all investors. We recommend that you seek your own independent legal or financial advice before proceeding with any investment decision.
This information may contain material provided by third parties. While such material is published with the necessary permission none of Westpac or its related entities accepts any responsibility for the accuracy or completeness of any such material. Although we have made every effort to ensure this information is free from error, none of Westpac or its related entities warrants the accuracy, adequacy or completeness of this information, or otherwise endorses it in any way. Except where contrary to law, Westpac Group intend by this notice to exclude liability for this information. This information is subject to change without notice and none of Westpac or its related entities is under any obligation to update this information or correct any inaccuracy which may become apparent at a later date. This information may contain or incorporate by reference forward-looking statements. The words “believe”, “anticipate”, “expect”, “intend”, “plan”, “predict”, “continue”, “assume”, “positioned”, “may”, “will”, “should”, “shall”, “risk” and other similar expressions that are predictions of or indicate future events and future trends identify forward-looking statements. These forward-looking statements include all matters that are not historical facts. Past performance is not a reliable indicator of future performance, nor are forecasts of future performance. Whilst every effort has been taken to ensure that the assumptions on which any forecasts are based are reasonable, the forecasts may be affected by incorrect assumptions or by known or unknown risks and uncertainties. The ultimate outcomes may differ substantially from any forecasts.
Conflicts of Interest: In the normal course of offering banking products and services to its clients, the Westpac Group may act in several capacities (including issuer, market maker, underwriter, distributor, swap counterparty and calculation agent) simultaneously with respect to a financial instrument, giving rise to potential conflicts of interest which may impact the performance of a financial instrument. The Westpac Group may at any time transact or hold a position (including hedging and trading positions) for its own account or the account of a client in any financial instrument which may impact the performance of that financial instrument.
Author(s) disclaimer and declaration: The author(s) confirms that (a) no part of his/her compensation was, is, or will be, directly or indirectly, related to any views or (if applicable) recommendations expressed in this material; (b) this material accurately reflects his/her personal views about the financial products, companies or issuers (if applicable) and is based on sources reasonably believed to be reliable and accurate; (c) to the best of the author’s knowledge, they are not in receipt of inside information and this material does not contain inside information; and (d) no other part of the Westpac Group has made any attempt to influence this material.
Further important information regarding sustainability-related content: This material may contain statements relating to environmental, social and governance (ESG) topics. These are subject to known and unknown risks, and there are significant uncertainties, limitations, risks and assumptions in the metrics, modelling, data, scenarios, reporting and analysis on which the statements rely. In particular, these areas are rapidly evolving and maturing, and there are variations in approaches and common standards and practice, as well as uncertainty around future related policy and legislation. Some material may include information derived from publicly available sources that have not been independently verified. No representation or warranty is made as to the accuracy, completeness or reliability of the information. There is a risk that the analysis, estimates, judgements, assumptions, views, models, scenarios or projections used may turn out to be incorrect. These risks may cause actual outcomes to differ materially from those expressed or implied. The ESG-related statements in this material do not constitute advice, nor are they guarantees or predictions of future performance, and Westpac gives no representation, warranty or assurance (including as to the quality, accuracy or completeness of the statements). You should seek your own independent advice.
Additional country disclosures:
Australia: Westpac holds an Australian Financial Services Licence (No. 233714). You can access Westpac’s Financial Services Guide here or request a copy from your Westpac point of contact. To the extent that this information contains any general advice, it has been prepared without taking into account your objectives, financial situation or needs and before acting on it you should consider the appropriateness of the advice.
New Zealand: In New Zealand, Westpac Institutional Bank refers to the brand under which products and services are provided by either Westpac (NZ division) or Westpac New Zealand Limited (company number 1763882), the New Zealand incorporated subsidiary of Westpac ("WNZL"). Any product or service made available by WNZL does not represent an offer from Westpac or any of its subsidiaries (other than WNZL). Neither Westpac nor its other subsidiaries guarantee or otherwise support the performance of WNZL in respect of any such product. WNZL is not an authorised deposit-taking institution for the purposes of Australian prudential standards. The current disclosure statements for the New Zealand branch of Westpac and WNZL can be obtained at the internet address www.westpac.co.nz.
Singapore: This material has been prepared and issued for distribution in Singapore to institutional investors, accredited investors and expert investors (as defined in the applicable Singapore laws and regulations) only. Recipients of this material in Singapore should contact Westpac Singapore Branch in respect of any matters arising from, or in connection with, this material. Westpac Singapore Branch holds a wholesale banking licence and is subject to supervision by the Monetary Authority of Singapore.
Fiji: Unless otherwise specified, the products and services for Westpac Fiji are available from www.westpac.com.fj © Westpac Banking Corporation ABN 33 007 457 141. This information does not take your personal circumstances into account and before acting on it you should consider the appropriateness of the information for your financial situation. Westpac Banking Corporation ABN 33 007 457 141 is incorporated in NSW Australia and registered as a branch in Fiji. The liability of its members is limited.
Papua New Guinea: Unless otherwise specified, the products and services for Westpac PNG are available from www.westpac.com.pg © Westpac Banking Corporation ABN 33 007 457 141. This information does not take your personal circumstances into account and before acting on it you should consider the appropriateness of the information for your financial situation. Westpac Banking Corporation ABN 33 007 457 141 is incorporated in NSW Australia. Westpac is represented in Papua New Guinea by Westpac Bank - PNG - Limited. The liability of its members is limited.
U.S.: Westpac operates in the United States of America as a federally licensed branch, regulated by the Office of the Comptroller of the Currency. Westpac is also registered with the US Commodity Futures Trading Commission (“CFTC”) as a Swap Dealer, but is neither registered as, or affiliated with, a Futures Commission Merchant registered with the US CFTC. The services and products referenced above are not insured by the Federal Deposit Insurance Corporation (“FDIC”). Westpac Capital Markets, LLC (‘WCM’), a wholly-owned subsidiary of Westpac, is a broker-dealer registered under the U.S. Securities Exchange Act of 1934 (‘the Exchange Act’) and member of the Financial Industry Regulatory Authority (‘FINRA’). In accordance with APRA's Prudential Standard 222 'Association with Related Entities', Westpac does not stand behind WCM other than as provided for in certain legal agreements between Westpac and WCM and obligations of WCM do not represent liabilities of Westpac.
This communication is provided for distribution to U.S. institutional investors in reliance on the exemption from registration provided by Rule 15a-6 under the Exchange Act and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors in the United States. WCM is the U.S. distributor of this communication and accepts responsibility for the contents of this communication. Transactions by U.S. customers of any securities referenced herein should be effected through WCM. All disclaimers set out with respect to Westpac apply equally to WCM. If you would like to speak to someone regarding any security mentioned herein, please contact WCM on +1 212 389 1269. Investing in any non-U.S. securities or related financial instruments mentioned in this communication may present certain risks. The securities of non-U.S. issuers may not be registered with, or be subject to the regulations of, the SEC in the United States. Information on such non-U.S. securities or related financial instruments may be limited. Non-U.S. companies may not be subject to audit and reporting standards and regulatory requirements comparable to those in effect in the United States. The value of any investment or income from any securities or related derivative instruments denominated in a currency other than U.S. dollars is subject to exchange rate fluctuations that may have a positive or adverse effect on the value of or income from such securities or related derivative instruments.
The author of this communication is employed by Westpac and is not registered or qualified as a research analyst, representative, or associated person of WCM or any other U.S. broker-dealer under the rules of FINRA, any other U.S. self-regulatory organisation, or the laws, rules or regulations of any State. Unless otherwise specifically stated, the views expressed herein are solely those of the author and may differ from the information, views or analysis expressed by Westpac and/or its affiliates.
UK: The London branch of Westpac is authorised in the United Kingdom by the Prudential Regulation Authority (PRA) and is subject to regulation by the Financial Conduct Authority (FCA) and limited regulation by the PRA (Financial Services Register number: 124586). The London branch of Westpac is registered at Companies House as a branch established in the United Kingdom (Branch No. BR000106). Details about the extent of the regulation of Westpac’s London branch by the PRA are available from us on request.
This communication is not being made to or distributed to, and must not be passed on to, the general public in the United Kingdom. Rather, this communication is being made only to and is directed at (a) those persons falling within the definition of Investment Professionals (set out in Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (the “Order”)); (b) those persons falling within the definition of high net worth companies, unincorporated associations etc. (set out in Article 49(2)of the Order; (c) other persons to whom it may lawfully be communicated in accordance with the Order or (d) any persons to whom it may otherwise lawfully be made (all such persons together being referred to as “relevant persons”). Any person who is not a relevant person should not act or rely on this communication or any of its contents. In the same way, the information contained in this communication is intended for “eligible counterparties” and “professional clients” as defined by the rules of the Financial Conduct Authority and is not intended for “retail clients”. Westpac expressly prohibits you from passing on the information in this communication to any third party.
European Economic Area (“EEA”): This material may be distributed to you by either: (i) Westpac directly, or (ii) Westpac Europe GmbH (“WEG”) under a sub-licensing arrangement. WEG has not edited or otherwise modified the content of this material. WEG is authorised in Germany by the Federal Financial Supervision Authority (‘BaFin’) and subject to its regulation. WEG’s supervisory authorities are BaFin and the German Federal Bank (‘Deutsche Bundesbank’). WEG is registered with the commercial register (‘Handelsregister’) of the local court of Frankfurt am Main under registration number HRB 118483. In accordance with APRA’s Prudential Standard 222 ‘Association with Related Entities’, Westpac does not stand behind WEG other than as provided for in certain legal agreements (a risk transfer, sub-participation and collateral agreement) between Westpac and WEG and obligations of WEG do not represent liabilities of Westpac. Any product or service made available by WEG does not represent an offer from Westpac or any of its subsidiaries (other than WEG). All disclaimers set out with respect to Westpac apply equally to WEG.
This communication is not intended for distribution to, or use by any person or entity in any jurisdiction or country where such distribution or use would be contrary to local law or regulation.
This communication contains general commentary, research, and market colour. The communication does not constitute investment advice. The material may contain an ‘investment recommendation’ and/or ‘information recommending or suggesting an investment’, both as defined in Regulation (EU) No 596/2014 (including as applicable in the United Kingdom) (“MAR”). In accordance with the relevant provisions of MAR, reasonable care has been taken to ensure that the material has been objectively presented and that interests or conflicts of interest of the sender concerning the financial instruments to which that information relates have been disclosed.
Investment recommendations must be read alongside the specific disclosure which accompanies them and the general disclosure which can be found here. Such disclosure fulfils certain additional information requirements of MAR and associated delegated legislation and by accepting this communication you acknowledge that you are aware of the existence of such additional disclosure and its contents.
To the extent this communication comprises an investment recommendation it is classified as non-independent research. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and therefore constitutes a marketing communication. Further, this communication is not subject to any prohibition on dealing ahead of the dissemination of investment research.