Update Australia’s inflation rate rose more than expected in the March quarter, increasing the chances of another interest rate hike by the Reserve Bank next week. Fuel, vegetables and pharmaceuticals led rises.
The consumer price index rose by 0.9 per cent in the three months to March, quickening from 0.5 per cent in the December quarter, the Australian Bureau of Statistics said. Economists had been expecting a 0.8 per cent gain for the quarter.
From a year earlier, the CPI was up 2.9 per cent, the highest since the final three months of 2008.
”We’re starting the recovery with a much higher rate of inflation and that just bolsters the argument for rates being a little bit higher,” said St George chief economist Justin Smirk.
”It should definitely be a very close call in May.”
The central bank flagged inflationary pressures from the booming commodities sector as a primary reason for lifting its key cash rate to 4.25 per cent from 4 per cent earlier this month. Stronger quarterly inflation data bolsters the case for further interest rate rises in coming months, adding to the five increases since October.
Among the major cities, Melbourne prices rose the most in the three months, jumping 1.3 per cent. Perth followed at 1.1 per cent, while Sydney prices gained 0.8 per cent and those in Brisbane 0.7 per cent, the ABS said.
Among the price increases, fuel costs rose 4.2 per cent in the quarter, while pharmaceuticals jumped 13.3 per cent as a result of a cyclical reduction in the number of consumers who qualify for government assistance in paying for drugs, the ABS said.
Vegetable prices increased 10.3 per cent in the quarter, while electricity increased 5.9 per cent. Hospital and medical services rose 2.9 per cent.
Computer equipment dropped 5.9 per cent in the quarter as a stronger dollar made electronic imports cheaper. Furniture prices also dropped 4.6 per cent and fruit prices fell 5.7 per cent, the ABS said.
‘Uncomfortably high’
”I think inflation continues to run uncomfortably high at this stage in the cycle,” said RBC Capital Markets economist Su-Lin Ong. ”That’s before we head into the next upswing in growth.”
The non-tradeable component, or domestically generated inflation, rose at 1.5 per cent in the March quarter compared to a tradeable component, driven by global markets, which increased at only 0.2 per cent.
”That’s telling you there are price pressures coming through, particularly from the services sector,” she said, adding that next week’s RBA rates decision will be close.
The news propelled the dollar to as high as 92.05 US cents, before it gave back some of the gains. This morning, it was buying 91.54 US cents. A rising dollar suggests investors believe the chance of a rate hike has grown, as higher rates attract international investment.
Prior to today’s inflation data release, financial markets were rating the probability of another quarter-percentage point interest rate rise by the RBA next month as a one-in-four chance, according to Credit Suisse. The probability is now at a one-in-three chance.
According to the RBA’s preferred measures of inflation – the average of its trimmed mean and weighted medians – the rate came in at just over 3 per cent. The RBA aims to keep inflation over the medium term within a 2-3 per cent band.
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