Inflation edges up 0.6 per cent in December quarter, leaving RBA rate hike on the sidelines

Updated January 31, 2018 16:49:30

Despite a surge in the prices of fuel and fresh fruit and vegetables, Australia's inflation rate remained constrained in the December quarter.

Headline inflation edged up 0.6 per cent over the quarter and 1.9 per cent over the year, slightly below market expectations.

Underlying inflation — which strips out volatile items and is more closely watched by the Reserve Bank in setting interest rates — rose just 0.4 per cent for the quarter.

Over the year, core inflation rose 1.9 per cent to be still stuck under the RBA's target band of 2-3 per cent.

The headline inflation rise was underpinned by a 10.4 per cent rise in fuel, and fruit prices jumping by more than 9 per cent.

Offsetting that were falls in computers and TVs (-1.7 per cent) and data and telecommunications plans (-1.4 per cent).

Households will be feeling the pinch with strong growth in price of essential services such as housing, health, transport and education, while food and clothing have become cheaper.

RBA expected to stay on hold

The lower than expected result is unlikely to change the RBA's neutral stance on interest rates, as it comes in roughly in-line with in-house forecasts.

Deutsche Bank's Adam Boyton said the core inflation pulse looked to have softened a touch as 2017 progressed.

"With inflation remaining inconsistent with the RBA's target, and the household sector only just showing the earliest signs of recovery, we see no reason for the RBA to act in an overly pre-emptive — and potentially 'risky' — fashion with a too early series of rate hikes," Mr Boyton said.

"The RBA is, after all, an inflation-targeting central bank with a financial sector stability mandate," he noted.

Capital Economics Paul Dales said it was possible that price pressures are a little bit stronger than the ABS data implied.

"The weaker than usual changes in clothing, household goods and appliances may be due to larger than usual discounting around Black Friday and ahead of Christmas.

"Some of that may be reversed [in the next quarter] and the fourth figures are calculated from the new spending weights, which will have put some downward pressure on the CPI," Mr Dales said.

First posted January 31, 2018 11:35:35