Aussie CPI accelerates in 2Q07

The high growth low inflation period of late 2006 and early 2007 appears to be over as consumer prices surged 1.2% in the June quarter on the back of higher transport, food and health costs.

Treasurer Peter Costello was patting himself on the back as the annual inflation rate dropped to 2.1%, however the annual rate is misleading as it omits the sharp price rise in the 2Q06 which now drops out of the calculations. The important point is that the latest quarter shows that inflationary pressure are back.

The RBA's underlying measures of annual inflation rose 0.9 % pushing the annual rate into the top half of its 2-3% target prompting some economists to predict a interest rate rise in August as all but inevitable. Financial markets were quick to factor in the higher risk of a rate rise, placing the chance of an August rate rise at 68%.

Another interest rate rise would not be popular with home buyers facing a 30 year low in affordability and will do little for the government's re-election campaign. However the RBA can't sit on their hands forever in the face of rising prices.

A few days ago I wrote that I believed the RBA would not hike rates again this year. I may have to revisit that call very soon but probably not in August. It is my belief that the RBA will wait for a little more evidence before hiking again.