Inflation is not only high but accelerating, according to a report that strengthens the case for the Reserve Bank to raise interest rates next month for the fourth time in a twelve month period.
The TD Securities-Melbourne Institute Monthly Inflation Gauge showed prices increased by 0.3 per cent last month.
The rise was the third consecutive month of accelerating inflation and came despite the RBA's 0.25 per cent increase in official interest rates in November to 6.25 per cent. Inflation was 3.8 per cent last year, the survey found.
"My reading is that they will look at this and they will look at some of the signals of the underlying strength in the economy — the jobs numbers, the job ads numbers, that kind of stuff — and they are probably going to say 'it's time to go now'," said Don Harding, an economist at the University of Melbourne.
Higher inflation in December came as the price for bananas fell 40 per cent. The gauge last reached 3.8 per cent in August and has not been above it since May's 4 per cent. Both months brought rate rises.
While the study cites higher petrol prices as a source of upward price pressure, CommSec chief equities economist Craig James said in a report that petrol had fallen 1.4¢ in the past week and could fall another 7¢ in the coming fortnight.
Economists are split over the prospect of another imminent rise. ANZ chief economist Saul Eslake said housing figures for November, also released yesterday, showed a market that was slowing even before that month's rate increase. Commitments, or offers for mortgages that either have been or are expected to be accepted, fell by 1.2 per cent over the year to November 30.
"They (the housing finance figures) continue to suggest, as have earlier data, that the interest rate increases that took place during 2006 have flattened the trend in housing finance — I suppose, as you would expect," Mr Eslake said.
The figures would reverse some of the momentum towards higher rates that was built up after unemployment figures released last week showed stronger than expected jobs growth. "You could say, after the data of last week, that it (the housing finance data) perhaps slightly dampens the prospect of a further tightening of monetary policy in February, which the market had increasingly started to price in."
As recently as January 5, futures markets had priced a 28 per cent chance of an interest rate rise into the 30-day bank bill futures for March delivery. That market had yesterday priced in a better than 50 per cent chance.
Westpac senior economist Andrew Hanlan disagreed with Mr Eslake's appraisal and said the housing figures added to the case for another rate rise. Mr Hanlan described the drop of 0.6 per cent in loans to owner-occupiers as "very modest", and showed that previous rises had been less effective than might have been expected.
"Most people would have expected larger reaction to the interest rate tightening than we've seen," Mr Hanlan said.
"The fact that it came in basically flat in November, given the tightening of policy, is quite a resilient result."
Commonwealth Bank senior economist Michael Workman said the housing figures for November showed no impact from that month's rate rise, so they would be of little help to the RBA when it next considered raising rates. "We believe that December (and) January numbers will also show this gradual moderation as the interest rate effects work their way through the system," Mr Workman said.
"It's a pretty finely judged situation about whether there is going to be another rate rise."
Source: The Age, Melbourne Australia
