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The Australian sharemarket is st to open lower.
The West Australian The Australian sharemarket is st to open lower.

The Australian sharemarket followed the firmer lead from Wall Street to close at a fresh 20-month high, with sentiment helped by benign inflation data that quashed any fears that domestic rates could begin to rise in the near future.

The S&P/ASX 200 index rose 8.7 points, or 0.18 per cent, to 4787.8points after December-quarter inflation of 0.2 per cent fell well short the forecast 0.4 per cent increase, with insurance and financial services the biggest inflationary factors.

The trimmed mean increase 0.5 per cent, with fruit and vegetables declining 0.1 per cent.

Confirming the lack of pricing pressure in the domestic economy, "tradeable" goods declined 0.4 per cent, despite a 0.8 per cent rise in clothing and footwear.

"Given the very weak nominal retail sales reported so far, this rise in prices suggests that retail sales volumes could have been very weak in Q4," Westpac economists said.

The Australian dollar lost 0.3¢ to $US1.0535 as the inflation data raised the prospect of a rate cut by March.

However, HSBC economist Paul Bloxham said while inflation continued to be modest he expected the RBA to remain on hold because economic conditions had improved since then and the full effect of previous rate cuts was yet to be seen.

Overnight US stocks shrugged off a sharp fall in the Richmond Fed index, a one per cent fall in existing home sales in December and a cautious outlook from consumer giant Johnson& Johnson to close 0.4 per cent up.

After the close Google and IBM both narrowly beat analyst consensus earnings forecasts.

In Tokyo the Nikkei index was off 1.5 per cent at the close of the ASX after the detail of the Bank of Japan's stimulus announcement yesterday failed to impress investors.

The Shanghai composite index was down 0.4 per cent.

Goldman Sachs strategist Tim Toohey wrote in a client note that the rally in the S&P/ASX 200 index over the past 6 months ranked in the top 11 per cent of the past two decades, and a period of consolidation appeared likely in the nearer term.

"However, we are not of a mind to alter our preferred sector and stock selections," he said. "Instead, we would look for any pull back in the equity market to add to our current preferred sector overweights: Building Materials, Diversified Financials, Materials, Transport and Resources."

More to come…