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CPI figures concern economists

Broadcast: 24/10/2007

Reporter: Helen Brown

Today's inflation figure has intensified speculation that official interest rates could be pushed
as high as 7 per cent by next year with two interest rate rises.

Transcript

LEIGH SALES: Today's inflation figure has intensified speculation that official interest rates
could be pushed as high as 7 per cent by next year, with not one but two interest rate rises.

The Consumer Price Index was lower than expected, but the consumer prices that the Reserve Bank
looks at are ringing alarm bells. Helen Brown reports.

HELEN BROWN: There's a lot riding on the inflation figure and for many economists the message is
clear.

SU-LIN ONG, SENIOR ECONOMIST, RBC CAPITAL MARKETS: Inflation has accelerated and I think it leaves
the RBA very little choice but to hike at the upcoming November meeting.

HELEN BROWN: The headline number for the Consumer Price Index for the quarter is 0.7 per cent. But
underlying inflation, when the most volatile price changes are taken out, is at 0.9 per cent. And
that's the number that most economists say the Reserve Bank will be nervous about.

SAUL ESLAKE, CHIEF ECONOMIST, ANZ BANK: These are precisely the circumstances in which history
tells us that small increases in core inflation, if not dealt with, if not nipped in the bud,
ultimately become unsustainably rapid increases in inflation.

HELEN BROWN: The Treasurer is using the lower annual headline number of 1.9 per cent to back his
claim the economy is travelling well.

PETER COSTELLO, FEDERAL TREASURER: The fact that Australia is still running the Consumer Price
Index inflation rate below 2 per cent at a time when unemployment is at 33-year lows is really
quite remarkable.

HELEN BROWN: The headline rate was pulled down significantly by changes to child care costs and
lower petrol prices. Rental costs increased, as did food, especially foods that rely on a lot of
water.

The job of the bank is to look ahead and keep annual inflation within the target range of 2 to 3
per cent. Economists say price pressures are likely to grow, with international oil prices rising
and food costs unlikely to ease for quite a while even if there's rain.

Many analysts say it's these factors which mean the next interest rate rise is unlikely to be the
last. Another quarter of a per cent rise would take the rate to 6.75 per cent and the talk is of
the rate lifting to 7 per cent and perhaps beyond next year.

The Reserve Bank also has to consider the pressure of more money coming into the economy from the
promised tax cuts.

SU-LIN ONG: The announcements that we've had from the Government as well as Opposition Labor really
do little to make the RBA's job any easier. It does add to the pressure to lift rates further.

HELEN BROWN: The last rate rise was in August this year.

SAUL ESLAKE: I think it's an even more clear cut decision now than it was in August.

HELEN BROWN: The Reserve Bank meets on Melbourne Cup day. Their decision could contribute to the
national hangover.

Helen Brown, Lateline.

LEIGH SALES: And there will be more analysis of today's inflation figure and what it means for
Australia with a panel discussion on Lateline Business straight after this program.