Latest CPI reading suggests RBA has more to do

From The Sydney Morning Herald:

Rate rise more likely on high inflation

Core inflation rose more than expected in the September quarter as prices rose across the board, strengthening the case for an interest rate rise in November.

Australia's trimmed mean consumer price index (CPI) rose 0.9 per cent in the September quarter, for an annual growth rate of 2.9 per cent, the Australian Bureau of Statistics (ABS) said.

The weighted median CPI rose 1.0 per cent in the September quarter, with an annual rise of 3.1 per cent.

Market economists had expected the average of the two measures to rise by 0.8 per cent in the September quarter for an annual rate of 2.8 per cent.

The headline CPI rose 0.7 per cent in the September quarter, for an annual rate of 1.9 per cent.

The median market forecast was for a rise of 0.9 per cent in the September quarter and an annual pace of 2.1 per cent.

The ABS calculates the trimmed mean and weighted median measures on behalf of the Reserve Bank of Australia (RBA), which uses them to gauge the underlying trend in inflation.

Unlike the headline CPI, the RBA's underlying measures are subject to revision due to the seasonal adjustment of some of their components.

JP Morgan economist Jarrod Kerr said the weaker than expected headline number should be largely ignored, with the key core measures surprising on the upside.

He said high core inflation points to the need for the Reserve Bank of Australia (RBA) to raise interest rates again.

"I think the need to raise interest rates again, and the case for it, is becoming compelling," Mr Kerr said, adding the RBA will need to consider it carefully heading into its next board meeting in November.

He said JP Morgan expected rates to rise by 25 basis points to 6.75 per cent in November during the federal election campaign.

"Even though the headline number is weak ... the core measure is at 2.9, and that's right at the top of the RBA's band," he said.

The RBA aims to maintain inflation within a target band of two to three per cent.

Mr Kerr expects inflation to rise further in the fourth quarter of 2007.

He said price increases were across the board.

Food prices rose 1.8 per cent from the previous quarter, while housing was up 4.2 per cent, alcohol and tobacco up 3.1 per cent and health up 4.3 per cent.

Westpac senior economist Andrew Hanlan said the inflation reading should force the Reserve Bank's hand and prompt it to raise interest rates in November, adding that further rises were also in the pipeline.

"The economy has certainly accelerated very strongly over the past 12 months and is running at an above trend rate, and that's now generating widespread core inflation pressures," he said.

"We saw that in the June quarter, we saw that in the PPI (producer price index) and it's been confirmed today."

He said back-to-back readings of underlying inflation above 0.9 per cent meant annual inflation was now running at somewhere between 3.5 per cent and four per cent.

"That's well above the RBA's target band," he said.

"As long as you take the view that the ... economy is still strong and the credit crisis isn't about to crunch the economy, then certainly there is a need for a tightening of monetary policy."

"Our view is the Reserve Bank will take an optimistic line that the credit crisis will blow over and that world growth will remain above par in 2008

"We expect an immediate reaction from the Reserve Bank and a tightening of 25 basis points in November, but (we believe) that will be insufficient and we will need to see a follow-up move ... it's just a question of when."