Another interest rate cut looks less likely after annual inflation unexpectedly jumped to 2.7 per cent, the highest level in two years.
The prospect of another interest rate cut just became more difficult after the inflation rate unexpectedly jumped to its highest level in two years.
However, economists do not expect the Reserve Bank of Australia (RBA) will be in any rush to lift the cash rate while faced with rising unemployment.
Other new data on Wednesday showed consumer confidence slipped to a six-month low, undermined by last week’s report showing a shock loss of 22,600 jobs in December.
The consumer price index jumped by 0.8 per cent in the December quarter, almost double the rate expected by economists.
This pushed the annual rate of inflation to 2.7 per cent from 2.2 per cent previously and into the top half of the RBA’s two to three per cent target band.
Treasurer Joe Hockey said Labor’s carbon tax was still having an impact on prices.
“Labor senators should stop standing in the way of cost-of-living relief for Australian families and vote to repeal the carbon tax when parliament resumes,” Mr Hockey said in a statement.
But shadow treasurer Chris Bowen said the government had no economic plan to reduce cost-of-living pressures.
“A return to higher interest rates would squeeze family budgets and increase mortgage stress,” Mr Bowen said in a statement.
The Australian Bureau of Statistics recorded strong price rises for fruit and vegetables, domestic and international holiday travel, and tobacco.
Falling petrol prices partly offset these increases.
Underlying measures of inflation, which the central bank watches more closely for interest rate decisions, spiked by 0.9 per cent on average in the December quarter to 2.6 per cent annually.
“With inflation past its trough, we remain of the view that the RBA is unlikely to cut rates further and that hikes may be needed later this year,” HSBC Australia and New Zealand chief economist Paul Bloxham said in a note to clients.
However, other economists, such as Westpac chief economist Bill Evans, are not convinced the RBA is finished lowering the cash rate.
“Households are losing a little confidence, the labour market remains very difficult and the confidence boost around housing may be peaking,” Mr Evans said.
“(It) is all consistent with the eventual need for further relief.”
Mr Evans was releasing the latest Westpac-Melbourne Institute consumer sentiment index, which fell by 1.7 per cent in January, and stands at its lowest level since July and 6.6 per cent down since the September federal election.
But even without the latest data, Mr Evans was certain the RBA would hold rates steady at its first board meeting of the year on February 4 “amidst improving optimism around the world economy”.
The International Monetary Fund has made a modest upgrade to its global growth forecast in an update of its World Economic Outlook.
It now expects growth of 3.7 per cent this year, up from 3.0 per cent in 2013.
Mr Hockey described the report as “cautiously encouraging”.