- Australia's annual headline inflation held steady at 3.8% in January
- Underlying inflation has come in higher at 3.4%, up from 3.3% the previous month
- Both figures are above market forecasts
Australia's headline inflation rate remained steady at 3.8% in the 12 months to January.
But it is the underlying inflation rate of 3.4% that may give markets pause.
It came in slightly higher than the 3.3% reading the previous month, suggesting inflation - and a possible May cash rate rise - remains in play.
Both numbers are higher than consensus forecasts that tipped the annual figure to slow to 3.7% for the 12 months to January and trimmed mean inflation to come in at 3.3%.
Wednesday's Consumer Price Index (CPI) data also shows the CPI rose 0.4% over the month, rising to 0.5% in seasonally adjusted terms.
This was still a decrease on the 1% rise the previous month.
The trimmed mean inflation reading increased 0.3% for the month, seasonally adjusted.
What drove the increase?
The biggest monthly contributors to CPI increases were clothing and footwear (up 2.9%), health (up 2.7%), and housing (up 2.2%).
Annually, housing has been the biggest driver of inflation, up 6.8% with electricity prices the major contributor.
Electricity has seen 32.2% price growth in the 12 months to January.
This had been partly buffered by federal energy subsidies which have now ended as at 31 December.
However, this will have been offset by a drop in recreation and culture spending (down 3.4% for the month) and transport (down 0.7%).
What to read into the January data?
Monthly headline inflation readings are inherently volatile.
January is traditionally a softer month for inflation as people rein in after end-of-year spending although this month's data appears to buck the trend.
Some businesses may also reduce prices after taking advantage of higher end-of-year demand for select goods and services.
However, this is not the case for all sectors.
Overall, annual services inflation was down to 3.9% in the 12 months to January (from 4.1% the previous month).
What the inflation data means for interest rates
No doubt the Reserve Bank of Australia (RBA) will take the January inflation data into account when it meets to consider the cash rate on 16-17 March.
Although CPI data now includes quarterly readings - the RBA's preferred measure - the numbers are still considered untested as the basis for making cash rate decisions.
It's unlikely the RBA will shift the 3.85% cash rate in March, so soon after a 25-basis points lift earlier this month.
Markets were pricing in only a 9% chance of an increase although this will be subject to change after analysts consider the latest CPI data.
In any case, the figures confirm inflation remains outside the RBA's 2-3% target band.
Many big bank economists expect another cash rate hike in May although other market commentators believe the February increase will be the only one this year.
The RBA's monetary policy board will likely be waiting for the March quarterly inflation data, scheduled for release on 29 April, to make its call.
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