Fears of interest rate rises have been rekindled following the release of the March 2006 quarter inflation data today by the Australian Bureau of Statistics (ABS) showing headline inflation has now reached the upper limit of the Reserve Bank's target range of 2-3 per cent.

Headline inflation was reported to have increased by 0.9 per cent during the March 2006 quarter and by 3.0 per cent during the year to March 2006.

Contributing most to the overall increase were pharmaceuticals (14.2 per cent), vegetables (7.9 per cent), motor vehicles (1.4 per cent), secondary education (6.9 per cent), tertiary education (4.8 per cent), automotive fuel (1.4 per cent), overseas holiday travel and accommodation (2.6 per cent), rents (0.8 per cent), hospital and medical services (1.4 per cent), beer (1.6 per cent) and tobacco (1.4 per cent).

The most significant offsetting price falls were deposit and loan facilities (2.1 per cent), furniture (3.2 per cent), clothing and footwear accessories (3.5 per cent), audio, visual and computing equipment (1.5 per cent), men's outerwear (2.6 per cent), women's outerwear (1.6 per cent), children's and infants' clothing (4.0 per cent) and towels and linen (2.1 per cent).

Perth claimed the title of city with the highest inflation for the quarter with inflation increasing by 4.2 per cent during the year to March followed by Canberra (3.5 per cent); Darwin (3.4 per cent); Adelaide (3.1 per cent); Brisbane (2.9 per cent); Melbourne and Hobart (2.8 per cent each); and Sydney (2.7 per cent). 

An important measure of inflation called the underlying rate of inflation which excludes volatile items increased by 0.8 per cent during the quarter to be up by 2.2 per cent for the year to March.

Inflation in the non-tradables sector also increased at a faster rate than the tradables sector and currently stands at 3.1 per cent for the year to March compared to 2.8 per cent for the tradables sector.

The inflation data comes two days after the release of the March quarter producer price indexes which clearly showed a build up of inflationary pressures.  

Prices of preliminary stage commodities increased by 1.6 per cent during the quarter and by 8.6 per cent during the year to March; intermediate stage commodities increased by 1.5 per cent during the quarter and by 6.9 per cent during the year; and final stage commodities increased by 0.8 per cent during the quarter and by 3.8 per cent to March 2006.

Hagop Tchamkertenian, Printing Industries Manager of Industry and Commercial Policy, said that this latest data was likely to raise the prospects of the Reserve Bank of Australia (RBA) increasing interest rates within the next 3-4 months.

"What would be a concern to the RBA is not so much that the headline rate has now reached 3 per cent, but that the prospects for the underlying inflation rate which fell from 2.3 per cent last quarter to 2.2 per cent this quarter, are once again rising due to the build up of inflationary pressures," he said.

"The producer price changes gives us a good indication of what lies in the inflation pipeline. What is clearly evident from the latest figures is that the downstream industries are continuing to absorb the cost increases rather than pass them on to consumers.

"How long will downstream industries such as printng be prepared to continue doing that and suffer a profit squeeze in the process is open to speculation. Sooner or later however such industries will reach a point of no return and will be forced to pass on a greater proportion of the price increases.

"If that happens then both the headline inflation and underlying inflation will be higher. If interest rates rise the impact on the printing industry will be bad due to the slow down of economic activity," Mr Tchamkertenian said.

To access the ABS March 2006 quarter inflation summary document please click here.