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Inflation likely to keep RBA on hold

AAP logoAAP 26/10/2016

Inflation has edged up from record lows, reducing the chances of a Melbourne Cup day rate cut from the Reserve Bank.

A big jump in fruit and vegetable prices contributed to a rise of 0.7 per cent in the consumer price index in the September quarter, beating expectations of a rise of 0.5 per cent.

That takes the annual rate of inflation to 1.3 per cent, while the Reserve Bank's preferred measure of underlying inflation, which strips out volatile price movements, was 1.5 per cent over the year after a quarterly rise of 0.35 per cent.

Both measures remain below the RBA's medium term target range of two to three per cent.

Fruit prices jumped 19.5 per cent in the September quarter and vegetables rose 5.9 per cent, while a 2.3 per cent rise in tobacco prices and a four per cent rise in property rates and charges also contributed to the overall rise, CommSec chief economist Craig James said.

Inflation remains historically low, and below the RBA's target range, meaning the central bank could cut rates further from a record low of 1.5 per cent next Tuesday, he said.

"A rate cut on November 1 can't be totally ruled out. But financial markets are not betting on it - with pricing suggesting that there is a six per cent chance of a rate cut in November," Mr James said.

"And the Reserve Bank is indeed looking for reasons not to cut rates rather than reasons to reduce rates to new record lows."

Capital Economics chief economist Paul Dale believes the Reserve Bank's concerns about the housing market will offset weak inflation and soft labour market data.

"But with the stronger dollar set to limit inflation imported from overseas and low wage growth constraining domestic inflation, we still believe that persistently low underlying inflation will result in interest rates falling to 1.0 per cent next year," he said.

However, Citi economists are tentatively retaining their forecast for a November rate cut because market-based inflation, excluding volatile items, increased by just 1.2 per cent through the year to the September quarter.

"This remains at a four-year low and should continue to help dampen inflationary expectations (which feed into actual inflation)," the Citi economists said in a note.

"So there remains a good case for further easing by the RBA, but other macro developments including higher commodity prices could reduce the urgency for a near term rate cut."

Westpac senior economist Justin Smirk said inflation is likely to only gradually improve, with the the September quarter figures indicating some softness continuing in the non-traded sector, while competition among the supermarkets is still holding down overall food prices.

"So while we may argue we have seen the low point for core inflation, any acceleration from here is going to be a very mild one," he said.

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