Inflation rate may miss target

The Australian sharemarket is set to open higher ahead of an expected subdued third-quarter reading of inflation, which could see the headline rate fall below the Reserve Bank's target band for the first time in more than a year.

The Australian sharemarket is set to open higher ahead of an expected subdued third-quarter reading of inflation, which could see the headline rate fall below the Reserve Bank's target band for the first time in more than a year.

The SPI futures index was up 22 points to 5343. Global financial markets finished last week in positive territory, after the short-term resolution of the US budget and debt crisis lifted the cloud of uncertainty hanging over US government bonds.

The end to the political impasse also saw the US dollar fall against a range of currencies, with the Australian dollar closing at a four-month high of US96.77ยข.

Despite the recent strength of the dollar and forecasts of soft third-quarter CPI data, financial markets have continued to price in only a 10 per cent chance of another rate cut by the RBA at its November meeting.

Economists expect the headline inflation rate to lift to 0.8 per cent in the September quarter, with the underlying rate at 0.6 per cent.

The year-on-year headline rate was forecast to ease to 1.8 per cent, outside of the central bank's target band of 2 to 3 per cent, as the boosts from the carbon tax and health insurance rebate drop out.

The underlying inflation rate, which is more closely watched by the RBA, was estimated to reach 2.2 per cent.

"The inflation outlook remains quite benign," said Westpac senior economist Justin Smirk.

"While the disinflation impact of an appreciating currency is fading, so too is the boost from the carbon price."

Inflation is also expected to remain contained amid a soft labour market and continued weakness in consumer spending. Analysts said the rise in house prices was forecast to cause modest inflationary pressure.

The RBA was likely to monitor the impact of the dollar's 15 per cent slide between May and August on tradeables data, amid concerns the segment - comprising goods that have prices determined on the world markets - could record a shift from deflation to inflation.

"The large rise in tradeables prices reported in the New Zealand [third-quarter] CPI earlier this week highlights the risk," Commonwealth Bank chief economist Michael Blythe said.

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