Can the Aussie dollar ignore inflation?

The December CPI report has changed the game for the Reserve Bank and, potentially, for the Aussie dollar.

Today’s central bank meeting, as always, will be closely watched by many. What makes this gathering a little different to the last few is the December CPI report. The RBA often annualises a consumer price inflation over a rolling six month period in order to get a sense of the trend in prices. Measured this way inflation in the second half of 2013 increased to an annualised rate of 2.9%, up from 2% six months prior and higher than the headline 2.7% reading. Such a sharp rise puts it at the top end and only just inside the RBA’s band which is sure to make them feel more than a little uncomfortable. Higher inflation also threatens to send the Aussie dollar higher so the RBA has a battle on its hand.

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