Australian consumer prices rose only modestly last quarter but a surprisingly high reading for a key gauge of underlying inflation was enough to dent market speculation of future rate cuts and lift the local dollar. The main offender was the trimmed mean measure of prices which jumped 0.8 percent in the quarter and 2.9 percent for the year, above analysts forecasts of 2.7 percent. That could pose a challenge to the Reserve Bank of Australia's (RBA) confidence that inflation would stay comfortably within its long-term target band of 2 to 3 percent.
"The underlying numbers look a fraction higher - they're a warning sign that the inflation backdrop is not as benign as markets want to price in at the moment," said Michael Blythe, chief economist at Commonwealth Bank. "The Reserve Bank is probably happy to leave rates where they are for quite a while yet, and market pricing for some chance of a rate cut looks misplaced."
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