The annual pace of inflation picked up to 2.6 percent from 2.1 percent a month earlier. That was still within the Reserve Bank of Australia's (RBA) long-term target band of 2-3 percent, but up markedly from the October trough of 1.2 percent. "After a period of clear disinflation over the year from mid-2008, inflation has now not only bottomed out, but early signals suggest some emerging upside pressure," said Annette Beacher, senior strategist at TD Securities. "This shift justifies the recent rapid-fire adjustment to the cash rate from the RBA."
The central bank has lifted the cash rate by 75 basis points since October to leave it at 3.75 percent, and investors are pricing in a better-than-evens chance of another rise to 4.0 percent in February. Beacher expects a hike in February and then a pause in March, though much could depend on what the official consumer price index (CPI) for the fourth quarter shows next week.
The TD-MI gauge suggested the headline CPI would not be alarming, with the Melbourne Institute estimating it rose around 0.1 percent in the fourth quarter. That would lift the annual rate to a still modest 1.7 percent, from 1.3 percent in the third quarter. The RBA's preferred measures of underlying inflation have been stubbornly higher, however, and there was considerable uncertainty about what they would show.
With the economy recovering more quickly than many had expected, the RBA has recently been nudging up its inflation forecasts for this year. TD-MI's measure of the trimmed mean for inflation rose 0.1 percent in December, leaving the annual pace steady at 2.4 percent.
Contributing most to the overall change in the inflation gauge in December were seasonal price rises for holiday, travel and accommodation, fruit and vegetables, and automotive fuel. These were offset by falls in prices for rental accommodation, financial services, and books, newspapers, and magazines. Excluding volatile items like fruit and fuel, the index rose 0.1 percent in December and 1.9 percent for the year.