Inflation rampages, rate hike very likely


The Consumer Price Index rose by 3% nationally in the December quarter, prompting leading economists to predict an almost-certain February interest rate rise from the Reserve Bank of Australia (RBA).

The RBA aims to keep the headline inflation rate at 2-3% over an economic cycle, and is likely to raise interest rates in order to contain the rampant inflation.

The latest number sits at the very top of the RBA's target range for inflation, and a 16-year high for statistical measurements of inflation rates.

Craig James, chief equities economist with CommSec, predicted that inflation will remain above this target band until late 2008, rising to as high as 3.4-3.6% in the March quarter.

"The Reserve Bank would be justifiably worried about inflation," James said.

"They'll probably have no alternative but to lift rates again in February to slow the pace of the economy."

Contributors to rising inflation rates include retailers, who have been slow to pass on the benefits from the higher Australian dollar - and consumers, who are still spending "robustly", giving retailers little incentive to slash prices.

Another underlying cause of inflation is the ongoing rental crisis, which James said the federal and state governments will have to work together to address.

"The fundamental problem is a lack of investment, with investors more inclined to put their money to work in the share market, rather than the property market," James said.

"The investment playing field must be levelled, and governments can go a long way to achieving that by cutting stamp duty and other fees on property transactions. Rents are rising at the fastest pace in almost 18 years, boosting inflation and putting upward pressure on interest rates."

Tim Lawless, national research director with RP Data, warned that another rate hike will further reduce affordability levels in the country, which would make it even more difficult for people to buy properties.

"This could result in lower levels of demand for housing, which will translate to a subdued price growth in the market during 2008," he said.


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