CPI brings rate rise closer

The time when interest rates might again have to rise has moved closer with this week's release of inflation figures for the last quarter of 2004.

The Reserve Bank board meets on Tuesday for its first rates meeting of 2005 but there is very little chance it would decide rates need to rise yet, or indeed in the next month or so. But for some time higher inflation has been looming on the horizon and it may now be becoming a reality. This may force it to act within three to six months with a small 0.25 percentage point rise.

The CPI rose 0.8 per cent for the three months to December giving us an annual inflation rate of 2.6 per cent. While this is still well inside the 2-3 per cent target band the Reserve Bank uses to set official interest rates, inflationary pressures are on the rise and the target could well be tested in 2005.

There are numerous factors pointing to higher inflation at the moment. Such a strong jobs market with unemployment at 27-year lows means pressure on wage levels is inevitable. This will be the chief concern the RBA will be looking to forestall – an inflation outbreak from a wage-price spiral.

The latest Producer Prices Index show a 4.3 per cent rise for last year and it may be that these higher wholesale prices, now strong for sometime, are starting to flow through retail prices.

Add to that the fact that the benefit of lower import prices from a higher Aussie dollar seems to have run its course. So, on both the domestic and trade fronts, the picture on prices is not as rosy as last year.

The jobs market is strong and the housing market seems to be enjoying a soft landing, rather than a crash. So, in the absence of major downside concerns for economic activity, there is little to stop the RBA raising rates to staunch inflation, should prices really heat up.