Inflation rises more than expected

A slightly bigger than expected rise in consumer prices adds to arguments for the RBA to keep rates on hold next week.

Consumer prices rose slightly more than expected in the fourth quarter.

Australian consumer prices rose slightly more than expected in the fourth quarter of last year, adding to arguments for the Reserve Bank of Australia to keep interest rates on hold at its first policy meeting for the year on Tuesday.

The consumer-price index rose 0.7 per cent in the fourth quarter from the third quarter, and by 1.8 per cent from a year earlier, the Australian Bureau of Statistics said.

Economists had expected consumer prices to rise 0.6 per cent in the quarter, and by 1.7 per cent from a year earlier.

Trimmed mean core inflation, which strips out volatile price movements, and is key to interest rate decisions, remained weak, rising just 0.4 per cent on quarter and 1.6 per cent on year.

With core inflation languishing well below the RBA’s 2-3 per cent inflation target, the RBA’s bias will be to lower interest rates further over time.

Still, December employment data, published last week, showed unemployment falling to its lowest level in close to a year, giving the RBA more time to consider its next move.

Most economists now expect an interest rate cut, but not until closer to April.

BIS Oxford Economics chief economist Sarah Hunter said the data was in line with expectations and followed strong employment figures.

“It’s unlikely that we’ll see a cut in the cash rate on Tuesday,” she said.

Ernst & Young chief economist Jo Masters agreed the Reserve was likely to keep rates on hold.

The most significant price rises in the fourth quarter were for tobacco, which climbed 8.4 per cent on quarter, and domestic holidays, travel and accommodation, which were 7.3 per cent higher, the ABS said.

A 1.3 per cent increase in food prices was mainly due to severe drought conditions, it said.

The most significant price falls were international holidays, travel and accommodation which fell 2.9 per cent, and women’s garments which declined 2.5 per cent.

The Australian dollar was little changed versus the US dollar after the data, trading at around US67.70c.

Dow Jones Newswires, AAP