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The markets have been surprised this morning by a sharp uptick in the rate of inflation. Headline CPI rose 0.8% in the final quarter of 2013 for an annual increase of 2.7% (up from 2.2% the previous quarter). The more closely followed “core” inflation of trimmed mean and weighted median (which strip out volatile outlier data) both increased by 0.9% in the quarter and 2.6% for the year; both well above expectations of increases around the 2.3% level.
What we are clearly seeing is the impact on prices of the weaker A$ starting to be felt. Tradables inflation (those items which are imported) rose 1.0% in the year (after a 0.1% decline for the year to Q3); this is the first time that the tradables Inflation measure has been positive in 2 years. Non-tradables inflation also rose slightly to 3.7% (from 3.6%).
The markets have responded quickly with a sharp increase in the value of the A$, which moved up by one US cent on the release. These numbers have very clearly put to bed any lingering hopes of a further cut in the Cash Rate; indeed there are commentators already talking about the first hike coming as early as March (not a view we share). Nevertheless it is certainly true that the real (core inflation adjusted Cash Rate) is now negative for the first time in over 4 years. The last time we saw a negative real Cash Rate (Q3 2009) rates started to move quickly from 3.0% to 4.75% in a little over a year.
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