Interest rates are likely to rise again, despite sharemarket turbulence, after figures showing a sharp pick up in core inflation.
The Bureau of Statistics said core inflation on the Reserve's two preferred measures rose by an average 1.05 per cent over the final three months of last year giving an annual rate of 3.6 per cent.
This is well outside the bank's comfort zone of 2 to 3 per cent, and is likely to prompt another interest rate rise at the bank's next meeting on February 5, as it fights to quell rising inflationary pressures in an increasingly over-streched economy.
Bank governor, Glenn Stevens, who celebrates his 50th birthday today, said in a speech last Friday he remained concerned about inflation, despite turbulence on sharemarkets and the likelihood of a slowdown in US economic growth.
While economists had expected yesterday's share price dive could force the Reserve Bank to wait to lift interest rates, the Australian sharemarket has already recovered roughly 5 per cent.
The dollar spiked to US0.8747 cents soon after the announcement before retreating back down to US0.8710 around noon.
The Bureau said headline inflation rose by 0.9 per cent for an annual rate of 3 per cent, also uncomfortably high.
Commonwealth Bank of Australia senior economist John Peters said the RBA appeared set to raise the official cash rate in February by 25 basis point, to seven per cent, following the bigger than expected jump in inflation.
"It's much worst than expected by the markets,'' he said.
"Despite the volatility on global markets in the US, and the 75 basis point cut (to US interest rates) we think the case is there for the Reserve Bank to move on rates given the upbeat economic outlook despite the global volatility.
"As expressed by (RBA) governor (Glenn) Stevens, these numbers pave the way for another rate rise in February.''
Mr Peters said higher petrol prices, capacity constraints and a tight labour market after 17 years of economic growth were increasing inflationary pressures.
Healthier economic growth prospects in China and India are expected to keep Australian economic growth prospects strong as demand for commodities holds up, Mr Peters said.
Not everyone was convinced the Reserve Bank will act when they meet on February 5.
"The equity rout is making fourth-quarter inflation seem irrelevant,'' Matthew Johnson, senior economist at ICAP Australia told Bloomberg prior to today's report. "It's going to take something abnormal to get the Reserve Bank to lift rates.''
Futures markets yesterday responded to the share market meltdown by slicing bets that the Reserve Bank would raise official rates to 7 per cent when the bank's board meets next Tuesday, pricing the risk at a 17 per cent chance from 41 per cent on Monday.
In the September quarter, consumer prices gained 0.7 per cent on the previous three months, and came in at 1.9 per cent higher than a year earlier.
In the September quarter, those two RBA measures were 2.9 per cent and 3.1 per cent higher than a year earlier, the highest since the series began in the June quarter of 2003.
The US central bank, the Federal Reserve, is taking an alternative position, last night lopping three-quarters off official interest rates to 3.5 per cent after a surprise meeting. That move came even as December inflation picked up, with the Fed stating it is more concerned with reviving a stalling economy than price increases
