CANBERRA—Homebuyers should brace for another mortgage rate rise next month, with rising food and house prices likely to push the limits of the Reserve Bank of Australia's patience.
Today's inflation numbers point to another rate rise following the RBA's Melbourne Cup Day board meeting on November 6 - just a couple of weeks out from the November 24 election.
Federal Treasurer Peter Costello today tried to play down the risk of what would be the first rate rise during a federal election campaign in recent history.
But Labor Leader Kevin Rudd said Prime Minister John Howard and the treasurer should take responsibility for rising inflation.
Financial markets are now betting on an 85 per cent chance of a November rate move, and economists are predicting even more increases next year, given the promised tax cuts from both sides of politics.
RBA governor Glenn Stevens has repeatedly said in the past year that the bank will not baulk at raising interest rates during an election campaign if the economy needs it.
Financial markets expect him to keep to his word.
While the consumer price index (CPI) for the September quarter proved relatively tame, the RBA's preferred measures of underlying inflation rose sharply to the top of the central bank's inflation target.
These measures of inflation smooth out volatile items such as food and petrol prices and show whether inflation is becoming more embedded in the economy.
Mr Costello understandably chose to sidestep what he called the more "technical" measures, focusing instead on the CPI.
The CPI for the September quarter grew 0.7 per cent - including sharp rises in food, housing and financial services - taking the annual rate to 1.9 per cent, and below the RBA's two to three per cent target.
"The fact that Australia is still running a consumer price index inflation rate below two per cent at a time when unemployment is at 33-year lows is really quite remarkable," Mr Costello said in Melbourne.
"It shows that notwithstanding continuous growth and notwithstanding very strong job growth over recent years, inflation is still moderate in the economy."
But economists and the financial markets are looking at the underlying measures, given the frequency the RBA refers to them.
And they are not pleasant reading.
The RBA's trimmed mean measure of CPI rose 0.9 per cent for an annual rate of 2.9 per cent. Worse still, its weighted median measure jumped 1.0 per cent for annual rate of 3.1 per cent.
Economists had expected these core measures of inflation to rise 0.8 per cent on average, an outcome that would have made the case for a rate rise more borderline.
"We find it hard to see how Governor Stevens cannot hike on November 7, despite being in the midst of an official election campaign," said RBC Capital Markets senior economist Su-Lin Ong.
The problem for the coalition is that a rate rise in November is not a one-off.
It would mark the sixth increase since the 2004 election - a ballot won on the promise of keeping rates low.
Rates have already risen nine times since 2002 and at the current rate of 6.5 per cent stand at their highest level in 11 years.
HSBC chief economist John Edwards said the speed that inflation has grown as economic growth has accelerated suggests even higher rates may be needed next year.
"(Given) the commitment of both major parties in the electoral contest to a major tax cut from next July, we are now pencilling another rate increase in March and pondering whether there may be still more to come through 2008," Mr Edwards said.