Don't be surprised if the Australian dollar hits 90 USc in the next two weeks as market bulls and bears battle it out over whether an interest rate rise will happen at the Reserve Bank board meeting in 12 days time.
Consumer prices rose 1.2% in the June quarter, above market forecasts for a 1% rise and the annual ratewas 2.1%, instead of forecasts of around 1.8%.
According to some economists there's a 50% to 80% chance that rates will rise at the next RBA board meeting. That's quite a shift in sentiment.
But as we saw in March and April this year, the market can be wrong: a rise was a hot tip back then.
The dollar crunched past 88.50 USc in Australian trading yesterday in the wake of the higher than expected June quarter Consumer Price Index, and larger than expected increases in the Reserve Bank's measures of core inflation.
The Aussie traded down to 88.30 UScin New York overnight.
The RBA's measures were higher than forecast and are now just inside the upper limit of the 3% top of its inflation range.
The RBA's two measures were published with the CPI figures from the Australian Bureau of Statistics yesterday.
The trimmed mean CPI rose 0.9 per cent in the June quarter, for an annual growth rate of 2.7 per cent. Meanwhile, weighted median CPI rose 0.9 per cent in the June quarter, with an annual rise of 2.8 per cent.
That's well above the market estimates of 0.7 per cent in the June quarter for an annual rate of 2.5 per cent.
There's a bit of financial illusion in the annual rate: because the June quarter of 2006 saw a rise of 1.6 per cent and isout of the equation, the annual rate fell: not by as much as had been predicted, but is now running at a three-year low for statistical reasons.
But because the oil price seems to rise these days in the June and September quarters and then ease in the northern winter, there might be an easing of inflation towards the end of the 2007 year, but again there might not because the RBA had been expecting inflation to rise again at the end of the year and into 2008.
Some analysts say the bank will wait until the New Year before doing anything, but it moved in November last year to nip in the bud what it saw was an inflationary tangle ahead in 2007 (there wasn't) and it also lifted rates last August for the same reason, and was spot on.
The argument is go in August and knock prices on the head (there's considerable room to do that without impacting the broader economy).
Petrol and fruit were once again among the fastest growing items in consumer shopping, and rents rose by 1.6 per cent over the three months, the largest quarterly gain since September 1989.
That's a direct result of the nasty combination of the sluggish housing markets and the booming markets, especially in Brisbane, Perth and Darwin where it is becoming Sydney-like to buy a house in terms of costs.
HSBC chief economist, John Edwards, told AAP that while higher petrol prices were to blame for the big jump in inflation in the June quarter "It means the Reserve Bank has to move in August. Given the strength of economic growth overall, I think that all the circumstances are in place for a tightening. You can't exclude another one."
Grange Securities research director Stephen Roberts said the RBA has been given a push toward raising rates." It's making it much more likely that we get an interest rate increase and possibly in August," he said. "These are the highest quarterly readings we've had over the past four years."
ANZ chief economist Saul Eslake said the RBA would be thinking carefully about tightening monetary policy. "At this stage my on-balance judgment is they won't go, but it's a much finer judgment," he said. "It certainly puts the issue of a rate rise next week back on the table."
And Westpac is now expecting a rate rise in August and possibly a second later in the year (like in 2006).
Twenty-two of 27 economists surveyed by Bloomberg News this month say the central bank will raise rates by the end of the first quarter of 2008. Ten expect an increase this year.
And, as expected, there was no sign of any suggestion of a rate rise from the Federal treasurer in his comments on the CPI.
"Moderate underlying inflationary pressures should see the CPI remain contained in the period ahead. Labour costs are continuing to grow at a modest pace and the strong Australian dollar is expected to put some downward pressure on inflation.
"However, high world oil prices and the effects of adverse climatic conditions on food production continue to create some uncertainty around the inflation outlook.
"The Government's sound economic management has ensured that the Australian economy has the flexibility to adjust to substantial price fluctuations.
"Australian households are benefiting from the higher standard of living that comes with solid economic growth, sustainable wage growth, near record labour force participation and the lowest unemployment rates in 32 years," Mr Costello said in a statement.
Now, if he was in opposition…..?