Expectations grow for interest rate hike next week after Australia’s inflation jumps to 3.8%

Inflation jumped to 3.8% in the year to December, from 3.4% in the month before, as strong underlying price growth added to the chance of a Reserve Bank rate hike next Tuesday.The latest figures from the Australian Bureau of Statistics suggested that Australian households once again face a fight to bring rapidly rising consumer prices back under control.That battle will now start with a rate hike – the first since November 2023 – at next week’s RBA monetary policy board meeting, according to ANZ economists, who changed their call in response to the latest figures.“We think the RBA will conclude that demand is running ahead of supply and that an interest rate adjustment would help ensure inflation returns to the target,” the ANZ’s head of Australian economics, Adam Boyton, said.“We view this as a single ‘insurance’ tightening, not the start of a series of rate hikes,” he said.Climbing housing costs in the year to December helped drive the unexpectedly high annual inflation figure.That included a 3.9% rise in rents and a 21.5% surge in electricity prices as power bill subsidies rolled off in Queensland and Australia" class="entity-link entity-location" data-entity-id="706" data-entity-type="location">Western Australia.Cost of living pressures were evident in supermarket prices, where food and non-alcoholic drinks lifted by 3.4% in the year to December, the ABS data showed.There was also a nearly 10% annual jump in travel and accommodation prices as costs surged in December, coinciding with the Ashes cricket tour and the start of summer holidays.While the latest headline inflation figures are well above the RBA’s 2-3% target range, they have been temporarily boosted by the rolling expiry of the government electricity subsidies.Removing the more extreme price moves, and the central bank’s preferred quarterly trimmed mean measure lifted by a substantial 3.4% through the year, from 3% in the September quarter.That was higher than anticipated by most economists, and after last week’s strong jobs figures have firmed the prospect of higher rates.“All up, it appears to be game, set and match for a rate rise at the February policy meeting,” said David Bassanese, chief economist at BetaShares.Reflecting these shifting expectations for rate moves, the Aussie dollar jumped back above US70 cents following the release of the ABS data.Financial markets were predicting a 60% chance of a rate hike next week before the release of this morning’s figures.