Economic heat means interest rate rise is looming for home owners

http://www.news.com.au/money/interest-rates/consumer-price-index-rose-16pc-in-march-quarter/story-e6frfmn0-1226045561164
Australian Associated Press | April 27, 2011

Prices in Australia’s economy have been growing faster than expected, figures showed today, meaning the Reserve Bank is likely to be forced to lift interest rates sooner than expected.

Annual inflation was running at 3.3 per cent the latest data showed – more than the 3 per cent predicted by economists.

The figure has led experts to predict the Reserve Bank will have to step in to take some of the heat out of the economy.

The inflation drivers include the price of fruit, which rose 14.4 per cent, and automotive fuel – petrol – which rose 8.8 per cent and electricity up 5.5 per cent.

While the Federal Government says the spike is “unsurprising”, economists say there are inflationary pressures across the economy. Some say this means there will be sustained pressure on the Reserve Bank over the coming months.

REACTION

Treasurer Wayne Swan described the result as an “unsurprising spike”, saying inflation was always going to be pushed up by the effect of natural disasters on fruit and vegetable prices.

The Treasurer said inflation was under control for now, before the big hit from the emerging mining boom.

The rises in fruit and vegetable and petrol prices in the March quarter accounted for 0.8 per cent of the total of 1.6 per cent, while seasonal rises in education and health costs also contributed significantly.

Mr Swan said the high prices caused by the “summer of disasters” would unwind over coming months.

Shadow Treasurer Joe Hockey said Wayne Swan was “out of touch” with the price pressures on families.

Mr Hockey said some rises had nothing to do with the natural disasters, such as a 5 per cent rise in electricity charges and a 13 per cent jump in pharmaceuticals.

“If we didn’t have a strong Australian dollar you can only imagine the effect fuel prices would have on families,” he said.

ICAP senior economist Adam Carr said the figures suggest that the central bank must act soon – but possibly not until after the Federal Budget is delivered on May 10.

“The RBA has to hike rates – they don’t have a choice,” Mr Carr said. “The arguments for them to hike are compelling (and) the arguments for them to hold are non-existent.

“I still think, because of the politics of the decision, they’ll potentially hold off until June but it’s very clear that inflation pressures have spiked higher.”

The dollar rose to a record high after the result was announced. It peaked at just over 108.5 US cents, the highest since the currency was floated in 1981.

The RBA adjusts the cash rate to keep the inflation rate in a target band of 2 to 3 per cent on average over the medium term.

Mr Carr said the higher than expected core inflation figure should not be interpreted as being because of flooding in Queensland.

“Global prices have spiked and we’ve seen food inflation around the world pick up sharply.

“For people who want to blame this on the floods, they need to get their head out of the sand because that’s not the reality.

“The reality is, food prices are rising around the world and the RBA has a job to do and they need to just do it, rather than focusing on this dribble that people are pumping out about depressed consumers and one-off flood impacts from CPI – that’s not a reality.”

JP Morgan economist Helen Kevans said the CPI was much stronger than expected.

“We saw significant contributions from food and housing and of course health and education, which was quite standard at this time of year.

“But there were important offsets, we saw a decline in clothing and footwear, and also household furnishings, which was as a result of the stronger currency.”

‘August rate rise’

Ms Kevans is expecting the RBA to raise the cash rate in August, not because of the March quarter inflation data but because of the outlook for inflation for the remainder of 2011.

“I think for the RBA it will be a concern because the headline figure will be well above the RBA’s target for the foreseeable future and that the core measure will be at the top end of the target by the end of the year.

“With the terms of trade and investment backdrop we do think the RBA will have to tighten again and we think the next rate hike will be in August.

Nomura chief economist Stephen Roberts said the price increases in the CPI was broad-based.

“Of 11 major CPI categories, seven of the 11 inflated by more than 1 per cent on a quarter on quarter basis,” he said.

“It was high on the underlying inflation rates so if you get my way of thinking the Reserve Bank will have to go sooner rather than later with another rate hike.

“I think that partly accounted for the blip up in the Australian dollar.”

Mr Roberts said he expects the headline rate of inflation to stay well above 3 per cent for the remainder of 2011 and into 2012.

He said this would be driven by Australia’s historically high terms of trade, the renewed mining boom and price rises elsewhere in the economy.

“There’s very strong fundamentals and there’s been underlying price pressures running through most services sectors.

“The only real offsets have been through imported goods, that was still there to a degree in the CPI but nowhere enough to hold it back inside the Reserve Bank’s target range.”

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