Inflation and interest fears

The big news today is about stronger than expected inflation figures for the December quarter leading to shocks in the stock market.

I must say, I'm not particularly worried about the news. And I'm glad I'm not worried, because Australians are likely to see a a lot more inflationary pressure over the next few years.

Just because I like to be different, i'm going to go out on a limb and say that the RBA will not increase the cash rate next week? I don't think the reported increase in CPI is really as significant as everyone seems to think.

Looking at the figure below, while (headline) CPI has indeed increased by 2.1% over the 12 months to the December quarter 2009, this was from a very low base. In December 2008, the inflation actually decreased quarter on quarter.

The actual CPI growth over the year was recorded in the September quarter (1%), and the RBA has already accounted for this growth by increasing the cash rate at both its November and December meetings (it raised it at it October meeting but September quarter data would not have been available at that time).

In truth, I'm surprised to see the December quarter CPI as low as it is. In fact, what we see here is a reduction in price growth over the December quarter (albeit December quarter on quarter growth has historically been significantly lower than other quarters). Quarter on quarter growth for September quarter was double that for the December quarter.

And, irrespective of the quarter on quarter increase, the data only reflects an annual increase in CPI of 2.1%, well within the bounds of the RBA's target zone of 2% to 3% per annum.

No problems... yet