For the third month in a row the TD Securities-Melbourne Institute monthly inflation gauge has shown no easing in the level of inflationary pressures in the economy.
The latest survey results, released yesterday, would appear to support the case for an interest rate rise in February and that was the line being pushed by the firm.
But earlier in the day Goldman Sachs JB Were repeated their comment from late last year that they saw no rate rise this year with rates on hold at current levels throughout the year.
Goldman and other commentators say they expect a hawkish speech Friday night, our time in London from RBA Governor, Glenn Stevens.
He will be up to date with thinking in the Bank of England and the European central bank about inflation and growth. Both left rates unchanged last week despite inflationary pressures evident in both economies. Britain's producer prices hit a 16 year high overnight in December at 11.2%.
Despite that some commentators believe the RBA will follow suit while it awaits evidence of the Fed's next move at the end of January.
For that reason chances of a rate rise here (unless the consumer price numbers next week are dire) are unlikely.
The TD Securities-Melbourne Institute monthly inflation gauge rose by 0.6% in December, following consecutive 0.3% rises in October and November.
The Reserve Bank moved rates in November and the banks have lifted business and mortgage costs, as well as rates on other loans since by varying amounts to reflect the impact of the boost to market rates from the credit crisis.
TD Securities said the inflation gauge rose by 3.7% in the 12 months to December, following a 3.4% rise for the twelve months to November.
The annual reading was the highest since December last year.
The underlying or trimmed mean rate rose by 0.5% (similar to that used by the RBA) in December, following a 0.4% rise in November, and was up 3.6% over the year.
The TD/MI core inflation measure, which excludes volatile items such as petrol, and fruit and vegetables, rose by 0.4% in December after a 0.1% rise in November.
In the 12 months to December, the core inflation measure rose 3.4%.
"Not only has inflation pressure remained strong, it intensified in December," TD Securities senior strategist Joshua Williamson said.
He said the Reserve Bank of Australia (RBA) would be particularly uneasy with both headline and underlying inflation exceeding 3% and with the fact that there are few signs, if any, that inflation pressures are easing.
"Resilient domestic data and confirmation of an inflation break-out strongly advance the case for an increase in interest rates at the February RBA board meeting, even with the financial markets pricing in the risk of a US recession.
"It would seem that only a bout of even more intense market weakness stands in the way of an interest rate rise on February 5," he said.
Contributing most to the overall increase were increases in the cost of petrol, rental accommodation and overseas holiday travel as well as the November interest rate rise, the figures show.
The price of petrol for the twelve months to December rose by 17.2%, while the price of rental accommodation rose by 8.6% over the same period – the highest annual increase in rental accommodation prices in the history of the inflation gauge.
"The sharp increase in dwelling rent is evidence of a major inflation problem that is linked to the commodities boom, fiscal policy largesse, a labour market skills and housing shortage," Mr Williamson said.
"Given the housing shortage is certain to persist right through 2008 and possibly beyond, the rise in dwelling rent is likely to underpin inflation for some time."
The December quarter Consumer price Index is out next Wednesday and will be the guide for the RBA, along with any decisions from the Fed on US interest rates. The Fed meets at the end of the month and is considered certain to drop rates by 0.50%. That could come sooner if the inflation figures this week aren't too out of line.
But while the TD Securities line is a bit of 'conventional wisdom', a more balanced view came yesterday from investment bank Goldman Sachs JBWere.
It said in a note to clients that "at a time when the economy is clearly capacity constrained, maintains considerable momentum and underlying inflation is already set to breach the top of the RBA's 2-3% target band, we believe (RBA Governor Glenn) Stevens will have no choice but to reaffirm a tightening bias.
"Nevertheless we think that at 45% probability, the market continues to overestimate the chance of a rate hike following the February meeting.
"Indeed with the US economy teetering on the edge of recession and the recent de facto tightening as Australia's major banks have passed on the increased cost of wholesale funding, we see the cash rate remaining on hold throughout 2008," Goldman Sachs said.
Bloomberg said yesterday that Australia's central bank may raise the benchmark interest rate in the first quarter of 2008 to quell inflation, economist says.
"Governor Glenn Stevens and his board will increase the overnight cash rate target by a quarter-point to 7% according to 15 of 25 economists surveyed by Bloomberg News. Policy makers meet to decide on rates on Feb. 5 and again on March 4.
"Surging fuel costs, home rents and wages as the economy enters its 17th straight year of expansion have stoked speculation that Stevens will add to last year's two rate increases.
"Ten economists forecast the central bank will keep borrowing costs unchanged in the first quarter to gauge fallout from the U.S. housing recession and stock-market declines."
