Consumer prices surged in the March quarter, beating market expectations, suggesting that interest rates may be going up soon, economists say.
The Consumer Price Index (CPI) rose by 1.6 per cent in the March quarter for an annual inflation rate of 3.3 per cent, the Australian Bureau of Statistics (ABS) reported on Wednesday.
The market forecast had been for a CPI of 1.2 per cent for the quarter for an annual pace of 3.0 per cent. ICAP senior economist Adam Carr said the ABS figures suggested that the Reserve Bank of Australia (RBA) must act soon to put a lid on inflationary pressures.
The RBA adjusts the cash rate to keep inflation in a target band of two to three per cent over the medium term. “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.” Mr Carr said the higher than expected core inflation figure should not be interpreted as being due to the effect of flooding in Queensland.
“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.
“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.”
Nomura chief economist Stephen Roberts said the price increases in the CPI were broad based. “Of 11 major CPI categories, seven of the 11 inflated by more than one 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.”
Mr Roberts said he expected the headline rate to stay well above three per cent for the remainder of 2011 and into 2012, 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,” he said. Macquarie Group senior economist Brian Redican said the more volatile components of the CPI were drove up overall inflation in the March quarter.
“We had higher fresh food prices as a result of the cyclone,” he said.
“We had a higher petrol price coming through, with oil prices jumping up. “We had the seasonal increases in education and health prices and even things like the reduction in term deposit rates by banks came through in the form of higher financial services prices.”
Mr Redican said inflation may cool off later in the year.
“As we get to the second half of the year, you get the reversal of those fresh food prices coming down and people would be surprised by how low inflation is at that time. “But that said, if the Reserve Bank does want to tighten policy, then this provides them a good excuse to do that.”