Rates to rise on inflation jump

Interest rates now look set to rise another quarter of a percent this Wednesday after the CPI for the June quarter showed headline inflation running at 4 per cent over the last year.

The highest quarterly inflation reading in over a decade at 1.6 per cent for the three months to June had a lot to do with big jumps in petrol and banana prices but it doesn't stop there. There were solid rises in food, health, financial services and household services. Meanwhile, the release of the PPI, the producer price index of wholesale prices earlier showed evidence of higher fuel prices flowing on to the prices of other goods and services.

The underlying rate of inflation, taking out the more volatile items, still remains within the Reserve Bank's target band at 2.8 per cent. But it's too close to the 3 per cent end of the range, and it is hard to see the RBA board not wanting to act with another rate rise and stay proactive in its efforts to stamp on any inflation threat.

Inflation only adds to the picture of a well-heated economy in recent months, as evidenced by strong jobs growth and healthy business and consumer confidence.

While the impact of the May rate rise is yet to fully impact, the strength of the economy in recent months, now makes that rise look too little to contain inflationary pressures.

So a 0.25 per cent rise in official interest rates to 6 per cent appears on its way, which would flow through to variable home mortgage rates, pushing the typical rate paid on a standard variable loan to around 7.28 per cent. A further rise later in the year is now on the cards, too, but no certainty yet. Infochoice analysis shows that a second rate rise will mean the bonus from the tax cuts delivered in the May Budget is now all but wiped out for many low and middle income Australians with a mortgage.

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