Inflation comes in higher than expected, puts pressure on rates
Published 23 January 2014, 13:15 AEST
Inflation has risen more than economists expected, diminishing the prospect of further interest rate cuts.
A recent private sector survey showed steep rises in fruit and vegetable prices. (Credit: ABC)
The Bureau of Statistics Consumer Price Index (CPI) for the December quarter rose 0.8 per cent, ahead of economist forecasts which centred on 0.5 per cent.
That followed a 1.2 per cent rise in the September quarter and took the annual rate of inflation to 2.7 per cent, above the mid-point of the Reserve Bank's 2-3 per cent target band.
The trimmed mean and weighted median CPI figures – which are preferred by the RBA because they exclude the most volatile price movements – also came in well above forecasts, rising 0.9 per cent for the December quarter and 2.6 per cent for the year.
The ABS says the most significant price rises for the quarter were a 6.9 per cent rise in domestic travel and accommodation, an 8.1 per cent jump for fruit, a 7.1 per cent rise in vegetables, a 1 per cent rise in new home purchase prices, a 2.6 per cent increase in the cost of international travel and accommodation and a 2.2 per cent lift in tobacco prices.
The bureau says seasonal factors accounted for most of the rise in both domestic and international travel, with peak season prices for accommodation and airfares coming into effect.
It does substantially reduce the chances of another rate cut.
Shane Oliver, AMP Capital Markets
It says fruit and vegetable prices have been driven higher mainly by a series of adverse weather events and difficult growing conditions in key areas.
Tobacco prices mainly rose due to a Federal excise tax increase on December 1, and from the flow on effect of an indexed excise rise in August.
The only significant price fall listed by the ABS was a 1.1 per cent slide in the cost of automotive fuel – a price decline that has quickly reversed in the new year.
The Australian dollar rose more than half a cent on the data, to reach 88.5 US cents from a level of 88.9 just before the release, as investors cut bets on the chance of further Reserve Bank interest rate cuts.
AMP Capital Markets head of investment strategy Shane Oliver says the figures would probably have raised some eyebrows at the Reserve Bank.
"Given the volatility you can see in the quarter-to-quarter inflation numbers in Australia, I don't think it would be enough to shock the Reserve Bank to hike," he told Reuters.
"But it does substantially reduce the chances of another rate cut."
CommSec economist Savanth Sebastian goes even further and says another interest rate cut is now off the table.
"The latest data closes the door on any further rate cuts. Financial markets see just a 3 per cent chance of a rate cut in February," he wrote in a note on the data.
"In turn, it is still too early to discuss rate hikes particularly given the sluggishness of the labour market. It seems the path of least regret is [for the RBA] to remain on the interest rate sidelines while talking down rates."