Inflation tipped to rise by 0.8%

THE headline inflation rate is forecast to rise 0.8 per cent in the December quarter, taking the annual rate to 2 per cent.

If this forecast by Westpac proves correct, it will be the first time the CPI has been in the Reserve Bank’s 2 per cent to 3 per cent target range since September 1996.

If, as expected, inflation increases by another 0.9 per cent in the current March quarter the annual CPI rate will push to 3 per cent.

Westpac economist Warren Hogan said that the inflation expectations justified an interest rate rise when the RBA met on 1 February.

“With economic activity strong in the early part of 2000 and expected to remain above trend into the second half of 2000, the RBA could justify a fifty basis-point rate rise in February on the basis that the tightening will measurably reduce ongoing inflation risk,” Mr Hogan said.

Westpac pointed to the 1.25 per cent increase in new house prices and dwelling rents increasing 0.7 per cent, which together make up 12.4 per cent of the CPI, as reasons for their high inflation expectations.

A 5 per cent increase in tobacco prices, petrol prices increasing 1.7 per cent after a 10 per cent gain in the third quarter and fresh vegetable prices rising 1.2 per cent will also impact on the CPI.

“Recent CPI outcomes indicate inflationary pressures have intensified in Australia in 1999,” Mr Hogan said.

“The impact of the GST on inflation in 1999, while difficult to estimate in the housing and motor vehicle sectors, has probably netted out among the various components to a negligible contribution to either underlying or headline inflation.

“Wespac’s expectation is that the RBA will raise the cash rate by 1.5 per cent over the first half of 2000, beginning with a 0.5 per cent move in February.

“This is based on an assessment that the current strength of activity, the recent intensification of inflationary pressures and accommodative monetary policy are inconsistent with the RBA’s medium-term inflation objective,” he said.

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