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Inflation surge may keep interest rates on hold

First quarterly inflation figure since the introduction of the carbon tax is higher than expected, reducing the chances of an RBA interest rate cut next month.

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Inflation jumped more than expected in the September quarter but remained at levels low enough to allow the RBA to cut interest rates again in November.

Data out today showed inflation rose 1.4 per cent in the three months to the end of September following the introduction of the carbon tax on July 1. That's almost three times faster than during the June quarter and the strongest rise in quarterly inflation since March 2011. Economists polled by Bloomberg tipped a 1 per cent rise as the impact of the carbon tax filtered through the economy.

On an annual basis, inflation increased 2 per cent, up from a 1.2 per cent rise in the year to June, the ABS said. Economists forecast the inflation rate would tick up to 1.6 per cent in the year to September. Core inflation, which is the number the RBA looks at when deciding on official rates, was 2.5 per cent in the year to September.

The Aussie dollar jumped from $US1.0275 to above $US1.03 in the moments after the data was released, with investors lowering their expectations of a rate cut in November. It has since eased back to $1.029.

During the quarter, electricity prices rose sharply 15.3 per cent as the carbon tax was factored into energy costs, while international holiday travel and accommodation rose 6.6 per cent. Food prices rose 1.9 per cent in the quarter, while housing increased 3.2 per cent. The biggest quarterly price falls were petrol, down 3.9 per cent, and cars, down 1 per cent, the ABS said. (Full breakdown by capital city and category.)

Rates impact

National Australia Bank forex strategist Ray Attrill said that because core inflation was "bang in the RBA’s target range" the central bank was unlikely to be dissuaded from a rate cut next month.

"On balance I think it’s more likely than not that the RBA will go," he said.

That's a view shared by Rochford Capital managing director Thomas Averill, who said that while the numbers outstripped expectations, they were not high enough to stop the RBA from cutting rates when it next meets on Melbourne Cup day. But he said expectations of future cuts could begin to moderate.

“The market had been looking for another 75 basis points cut down to 2.5 per cent over the next 12 months. You’re going to see those expectations moderate to 50 basis points worth of cuts,” he said. 

Mr Averill said the carbon tax was also having a visible impact on inflation figures.

“Energy prices have made a fairly big contribution to the inflation numbers,” he said. “The extent which the RBA can do anything about that through monetary policies is pretty limited.”

Before the CPI numbers were released, investors said there was a 79 per cent chance of a rate cut in November, but the strong reading saw those bets slip to 63 per cent.

Carbon tax

One economist said the larger-than-expected jump in consumer prices was in part due to the introduction of the carbon tax.

RBC Capital Markets senior economist Su-Lin Ong said the carbon tax had moved inflation up faster than anticipated, but that it was still comfortably within the RBA’s target.

“There is clearly some impact from the carbon tax there, but the core measures, which strip out a bit of that, are also firmer,” she said.

‘‘It’s still well behaved, core inflation, but it is moving up a little bit faster than we anticipated and you’d have to argue that there is a bit more broadbased strength in prices.

‘‘The market is going to question whether there is another rate cut on the cards. It’s probably looking like it is a much closer call than it was prior to these numbers.’’

The Reserve Bank aims to keep annual inflation between 2-3 per cent to ensure steady economic growth. Weaker inflation gives the central bank more scope to cut official rates if needed.

A series of weaker signals on the outlook for the economy have prompted 23 out of 26 economists polled by Bloomberg to predict a rate cut next month.

With Georgia Wilkins