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Fuel rises but inflation lags RBA target

Inflation remains below the Reserve Bank's target, despite a spike in fuel and tobacco contributing to a 0.6 per cent rise in the December quarter.

The consumer price index undershot economists' forecasts for a 0.7 per cent lift and, with annual inflation at 1.9 per cent for 2017, was short of the RBA's two to three per cent target range, figures from the Australian Bureau of Statistics on Wednesday showed.

Underlying inflation, which strips out volatile price movements, showed a quarterly rise of 0.4 per cent, taking the annual rate to 1.9 per cent.

ANZ senior economist Jo Masters said the latest inflation numbers were a solid result that pointed towards improvement.

"Overall the data suggest that inflationary pressures have stabilised just below the policy band and should rise gradually over time," Ms Masters said.

However, JP Morgan analyst Ben Jarman said despite the large increases in the volatile trio of fresh food, fuel, and tobacco - together adding 0.65 per cent to the inflation figure - the overall CPI reading was weak.

"We had expected today's result to be something of a head-fake and distraction from the very weak underlying trend in core inflation, but not even the bump from the volatile items measured above could cause a stir," Mr Jarman said.

Transport prices were up 2.4 per cent for the quarter, driven by a seasonally adjusted 10.4 per cent spike in the cost of fuel.

Higher tobacco costs were behind a rise in the alcohol and tobacco group, due to the ongoing impact of a 12.5 per cent increase in federal tobacco excise in September, 2017.

Other prices rises for the quarter came in domestic travel and accommodation, as well as rises in the price of vegetables and fruit, driven in particular by higher prices for strawberries and grapes.

Mr Jarman said prices in the services-dominated health, education and communications sectors were soft.

Weaker housing sales and discounts in durable goods shaved 0.8 per cent off the furnishings, household equipment and services group.

"Outcomes in the bellwether housing group were also tepid," Mr Jarman said.

CommSec senior economist Ryan Felsman said the RBA believes inflation won't hit two per cent until 2019.

"This view is due to increasing uncertainty about the size and timing of how wage pressures might eventually pass through to consumer prices," Mr Felsman said.

The Australian dollar fell on the release of the data and continued lower during the afternoon as new data released in China showed a slowing of Chinese factory activity during January.

After being at 81.00 US cents just before the figures were released at 1130 AEDT the Australian dollar was at 80.73 US cents at 1425 AEDT.

Austrlaian Associated PressBack to Breaking News

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