The first point that should be made is that when you watch tonight's TV news there is little doubt the media, either in the desire for alarmism or (more likely) through persistent exquisite ignorance will scream RATE RISE WARNING because Australia's annualised CPI reached 3.3% in the March quarter, which is “outside the RBA's target zone”. Disappointingly, I have already heard this on the ABC radio news.

Quarter in, quarter out the popular media makes the mistake of believing the RBA's target refers to headline inflation, which it doesn't. The RBA has a target on “core” inflation of 2-3%, as measured by assessing “trimmed mean” and “weighted median” results, which are not the number the ABS highlights as the “CPI”. Most notably, core readings ignore shifts in volatile prices of petrol and food in particular, as well as other items such as bank deposit and loan (D&L) costs.

And where do you think the March quarter's big price jumps came from? Petrol, food and D&L as it turns out. The quarter-on-quarter headline CPI rose 1.6% in March, taking the annualised rate up to 3.3% from 2.7% in the December quarter. Economists had expected a 1.2% quarter gain to 3.0% annualised. The 1.6% jump was the highest since 2006.

We know that petrol prices have been rising, given the rise in the price of crude has outstripped the counter effect of the rising currency. Food price rises were nevertheless anticipated by all and sundry as an inevitable impact of recent natural disasters around the country, net of Coles' attack on milk prices. The RBA has been well prepared for the food price hike and, to date, has suggested the blip would not alter its year-end inflation expectations. Economists were caught out by a big jump in D&L, but point out this is a volatile item.

“Core” inflation, taking an average of the RBA's two measures, rose 0.85% compared to 0.4% in the December quarter. This takes the annualised core rate to 2.2%. That's also above economist expectations but still at the lower end of the RBA's 2-3% target zone. In other words, the March quarter CPI result DOES NOT automatically imply a rate rise is imminent.

Having said that, economists are not dismissing the implications either. The unsurprising price drops in electronic goods for example in March are indicative of the “two speed” economy and of the impact of the strong Aussie in dampening inflationary forces otherwise driven by the commodities boom. As yet, no industry-wide average wage increases have been experienced, and the RBA had been sticking to a 2.75% core inflation expectation by year-end – still inside the zone. But those expectations may now have to be revised.

ANZ, for example, notes that core inflation increases would have to average 0.6% in subsequent quarters compared to March's 0.85% to achieve a 2.75% annualised result by year-end. While high petrol prices at the pump are not included in the core reading, the flow-on of transport costs to prices of all other goods is by default. As the current mining and energy construction boom gathers pace, wage increases are likely to follow. And costs of utilities continue on an upward trend.

The likelihood is that the RBA will now raise its year-end expectation to 3.0% from 2.75% according to Westpac and ANZ. That's the top of the zone, and the RBA is hellbent on being pre-emptive this time around having been caught out in the last commodity boom. In other words, the RBA will raise the cash rate before inflation starts to run away.

A rate hike nevertheless remains questionable until the June quarter CPI numbers are in, in July. Commonwealth Bank is still targeting the next rate rise as August but admits the risks have swung more in favour of an earlier move. Westpac is looking for a 25 basis point hike in the September quarter, while ANZ notes that money markets are still also pricing in little chance of a move before the September quarter. “In our view,” say the ANZ economists, “the odds are considerably higher than this”.

The stock market is clearly worried about a rate rise coming at least sooner rather than later. Having tentatively risen from the bell this morning, the ASX 200 has been sliding ever since. The Aussie has jumped through US$1.08 which isn't helping.

With a clear inflation and currency drag, a push through 5000 for the ASX 200 still looks like a tough assignment.

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