The acceleration in both headline but more particularly core inflation will be of concern to the RBA. It is likely, however, that the high inflation number will result in interest rates remaining on hold, rather than precipitate a hike. The rationale behind that view is that the price increases are not demand related which means consumers who are already constrained are having to deal with price rises on everyday goods, which is placing further pressure on household budgets.
The high inflation reading will also push up the AUD, which hit a new post float high immediately after the release, which will place further pressure on the non-mining export sectors and retailers. The high inflation will also quell calls for interest rate cuts and will fuel speculation over imminent rate hikes which is the most important factor. The net result will reinforce the weak consumer confidence reading from last month and precipitate the next leg down in the falling retail sales – falling credit growth – falling house prices negative feedback loop and could see the enduring dis-leveraging that we have been experiencing evolve into outright deleveraging.
This would stave off any need to increase rates as it would ease any demand driven inflationary pressure and with high commodity prices and the effects of the flooding to pass through the numbers over the coming quarters would result in the pace of inflation falling.