Inflation figures seal case for rate rise

Hotter-than-expected inflation figures have eroded the chance of an interest rate pause next month and likely locked in higher repayments for mortgage holders.

Inflation rose 7.8 per cent annually in the December quarter - the highest increase to the consumer price index since 1990, according to national statistics bureau data.

Quarterly inflation growth picked up from 1.8 per cent in the past two quarters to 1.9 per cent, but fell short of the 2.1 per cent three-month surge in the March quarter.

Underlying inflation, which excludes large price rises and falls, lifted 6.9 per cent annually.

The December quarter print outstripped expectations of a 7.6 per cent rise in headline inflation but fell short of the Reserve Bank's own predictions of an eight per cent annual increase.

Treasurer Jim Chalmers said inflation was unacceptably high, but either at or close to its peak.

"Inflation was the defining challenge in our economy in 2022 and it will be a defining challenge in our economy in 2023," he told reporters in Canberra.

Dr Chalmers was not surprised to see electricity prices surging 8.6 per cent over the three months, and said the government's price caps and other interventions would keep a lid on power prices going forwards.

ABS head of prices statistics Michelle Marquardt said the unwinding of Western Australia's $400 electricity credit also pushed up the figure for the December quarter.

The festive season also contributed to stronger-than-expected quarterly inflation, with domestic holiday travel and accommodation surging 13.3 per cent and international holidaying up 7.6 per cent.

While the headline figure fell below the RBA's forecasts, the all-important trimmed mean inflation was well above the central bank's forecast of 6.5 per cent.

RBC Capital Markets' chief economist Su-Lin Ong said the inflation figures cast some uncertainty over core inflation's peak and the central bank did not expect such a strong result.

The Reserve Bank will also likely be worried about sticky services inflation, which lifted 5.5 per cent annually and has been accelerating on a quarterly basis.

Ms Ong said consumers were clearly still spending generously on leisure and travel, even when accounting for pent-up post-COVID demand and the Christmas rush.

"There may still be more demand ahead and we also continue to highlight the lagged impact on services inflation from higher wages and labour costs," she said.

However, higher mortgage rates, declining real wages and a softening job market should start to slow down consumer spending soon.

She said the hot CPI print likely sealed the case for a 25 basis point hike in February and improved the likelihood the same hike in March, leaving the Reserve Bank cash rate at 3.6 per cent.

While services inflation surged in the December quarter, goods inflation experienced little change from the third quarter as shipping costs normalised and supply-chain disruptions eased.

New dwelling costs are still elevated on an annual basis but quarterly growth eased, largely thanks to easing material cost pressures.