Australia's Core Inflation Surges Past Forecasts, Raising Prospect of RBA Rate Move

Official data showed Australia's consumer prices rose 0.6% in the December quarter, lifting annual CPI to 3.6%. The trimmed mean measure of core inflation accelerated to a 0.9% quarterly increase and 3.4% annually, beating forecasts and increasing the likelihood of a near-term interest-rate rise by the Reserve Bank of Australia.

Key Points

Headline CPI rose 0.6% in Q4, matching forecasts, and annual CPI accelerated to 3.6% from 3.2% - impacting inflation monitoring and monetary policy assessments.
Trimmed mean core inflation increased 0.9% in the quarter versus a 0.8% forecast and the RBA's around-0.75% expectation, with the annual rate rising to 3.4% - above the RBA's 2% to 3% target band.
The stronger core print has lifted market bets on a near-term interest-rate hike, affecting rate-sensitive sectors and financial markets.

Data released on Wednesday showed Australian consumer prices rose at a quicker annual rate in the December quarter, with core inflation measures surprising on the upside and prompting renewed expectations of an interest-rate response.

The Australian Bureau of Statistics reported that the consumer price index climbed 0.6% in the fourth quarter, in line with market forecasts. On an annual basis, headline CPI accelerated to 3.6% from 3.2%. The statistics office noted that part of the lift reflected base effects and the impact of energy rebates.

More striking for policymakers was the behaviour of core inflation. The trimmed mean measure - a key RBA gauge of underlying inflation - rose 0.9% in the quarter, above expectations of a 0.8% increase and above the Reserve Bank of Australia's internal projection of around 0.75% for the period. That pushed the trimmed mean's annual pace up to 3.4% from 3.0%, placing it above the RBA's target band of 2% to 3%.

The stronger-than-expected core reading has been interpreted by markets as increasing the odds of a near-term tightening in monetary policy. Analysts pointed to the gap between the trimmed mean's annual rate and the RBA's target band as the principal reason the data has revived bets on an interest-rate hike.

Policy officials use measures such as the trimmed mean to assess persistent inflationary pressure, and the quarterly 0.9% rise will be a central consideration in forthcoming deliberations. The quarter-on-quarter and year-on-year moves captured by the ABS underscore that headline movements are not solely driven by short-term or one-off items; base effects and energy rebates have played a role, but the core measure's elevation indicates broader upward momentum in prices.

For markets and sectors sensitive to interest-rate changes, the data injects fresh uncertainty about the timing of any move by the Reserve Bank of Australia. Observers will closely monitor subsequent releases and the central bank's communications for confirmation that the recent trend in core inflation is persistent.

Summary

Australia's CPI rose 0.6% in Q4 and 3.6% year on year, while the trimmed mean core inflation increased 0.9% in the quarter and 3.4% annually, both exceeding forecasts and reviving prospects of a near-term RBA rate hike.

Risks

Near-term monetary tightening risk - the elevated trimmed mean increases the chance that the Reserve Bank of Australia will move to raise rates, which would affect borrowing costs and rate-sensitive sectors.
Inflation persistence above target - the trimmed mean's annual rate of 3.4% is above the RBA's 2% to 3% band, creating uncertainty for policy and for sectors exposed to higher input costs.
Measurement and base-effect uncertainty - the ABS noted that base effects and energy rebates contributed to headline CPI movements, which could complicate interpretation of how persistent the inflation trend is.

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Key Points

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