The S&P/ASX 200 Index (ASX: XJO) has returned to form in 2023.
Since the start of the year, the benchmark index has risen almost 6%.
Investors have been piling back into the market amid optimism that inflation is cooling.
In light of this, tomorrow's inflation data release could have a big impact on the performance of the ASX 200 index.
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What is expected from Wednesday's inflation reading?
According to the latest weekly economic report from Westpac Banking Corp (ASX: WBC), its team is expecting Australian fourth quarter inflation to be the peak. It explained:
Westpac is forecasting 1.5% rise in the December quarter boosting the annual pace 0.1ppt to 7.4% which is our forecast peak in the annual pace of inflation for the current cycle.
This will be a slower increase than what was seen in the third quarter of 2022, which the bank believes will prove to be the biggest quarterly increase in this cycle. It adds:
The reasons behind the step down from 1.8%qtr print in Q3 are the ongoing moderation in pace of price increases for food, clothing& footwear, new dwellings and household contents & services.
Where is inflation heading in 2023?
The good news is that the bank believes that inflation will then cool materially over 2023.
So much so, it expects headline inflation to be as low as 3.7% at the end of the year.
We are forecasting the annual pace of headline inflation to ease back to 3.7%yr by end 2023.
What does this mean for interest rates?
Unfortunately, Westpac doesn't believe the pain is over for borrowers.
It expects the Reserve Bank of Australia to take the cash rate from 3.1% currently to a peak of 3.85% by the middle of the year. This is likely to mean a series of hikes in the coming months.
