By Wayne Cole
SYDNEY (Reuters) -Australian inflation shot to a 33-year high last quarter as the cost of travel and electricity jumped, a shock result that adds to the case for the country's central bank to raise interest rates again next month.
Investors sharply narrowed the odds on the Reserve Bank of Australia (RBA) lifting its cash rate by a quarter point to 3.35% when it meets on Feb. 7, sending the local dollar up to a five-month high of $0.7085.
Analysts had thought there was some chance the RBA might even pause its tightening campaign, but the sheer pace of inflation put paid to that.
"While this is expected to be the peak in inflation in this cycle, the RBA's hawkish communications lead us to expect another rate rise in February, with another increase likely to follow in March," said Sean Langcake, head of macroeconomic forecasting for BIS Oxford Economics.
Data from the Australian Bureau of Statistics on Wednesday showed the consumer price index (CPI) surged 1.9% in the December quarter, outpacing market forecasts of 1.6%.
The annual rate climbed to 7.8%, from 7.3%, the highest since 1990 and more than twice the pace of wages growth. For December alone, the CPI rose a startling 8.4% compared to the same month a year ago, up from 7.3% in November.
Price rises were broad-based with a closely watched measure of core inflation, the trimmed mean, rising 1.7% in the December quarter. The annual pace accelerated to 6.9%, well above forecasts of 6.5%.
Costs pressures were also building in the service sector which recorded its largest annual rise since 2008, driven by holiday travel, meals out and takeaway food.
Travel was one of the main cost culprits in the December quarter with prices for domestic holidays up 13% and overseas jaunts almost 8%.
"Strong demand, particularly over the Christmas holiday period, contributed to price rises for domestic holiday travel and international air fares," said Michelle Marquardt, ABS head of prices statistics.
"The rises seen for domestic and international travel were notably higher than historical December quarter movements."
With inflation pressures broadening yet further, markets moved to price in the risk of at least two more rate hikes from the RBA with swaps implying a peak above 3.60%.
Futures for three-year bonds sharply reversed course to be down 3 ticks at 96.910, having been up as high as 97.090 before the CPI data.