Australia CPI inflation data published today show both headline and underlying measures accelerated sharply to new multi-decade highs in the three months to December. The two main measures of underlying inflation have now been above the Reserve Bank of Australia's target range of 2.0 percent to 3.0 percent for four consecutive quarters, while headline inflation has now been above this range for seven consecutive quarters.

Since it began to normalise monetary policy in May 2022, the RBA has increased policy rates by a cumulative 300 basis points from 0.1 percent to 3.10 percent, including an increase of 25 basis points at its most recent meeting early December. At that meeting officials indicated that further rate hikes are likely in coming months, and today's data will likely reinforce officials' conviction that further policy tightening will be required to return inflation to its target range over the foreseeable future. Officials may also consider resuming hikes of 50 basis points in response to today's data after opting for smaller increases of 25 basis points in recent months. The RBA's next policy meeting will be held early February and will be followed by updated inflation and growth forecasts.

Australia's consumer price index rose 1.9 percent on the quarter in the three months to December after an increase of 1.8 percent in the three months to September with headline inflation accelerating from 7.3 percent to 7.8 percent. This is the highest headline inflation rate since 1990.

Measures of core inflation, which exclude the impact of volatile price changes, also strengthened significantly in the three months to December. The trimmed mean CPI advanced 1.7 percent on the quarter after rising 1.8 percent previously, with the year-over-year increase picking up from 6.1 percent to 6.9 percent. This is the strongest increase in this measure since it was introduced in 2003. The weighted median CPI inflation measure rose 1.6 percent on the quarter after a previous increase of 1.4 percent, with the year-on-year increase rising from 5.0 percent to 5.8 percent, its highest level since 2008.

The strong quarter-over-quarter increase in the CPI in the three months to December was largely driven by a 2.6 percent increase in clothing and footwear prices, a 5.4 percent increase in recreation and culture costs, and an increase of 1.7 percent in transport costs. These were partly offset by small declines in communication costs and a smaller increase in food prices. All categories recorded large or at least solid year-over-year increases.

Quarter-over-quarter inflation in the fourth quarter is expected to slow 3 tenths to 1.5 percent.

The Consumer Price Index (CPI) is a measure of the average change over time in the prices paid by households for a fixed basket of goods and services. In Australia, the CPI measures the changes in the price of a fixed basket of goods and services, acquired by household consumers who are residents in the eight State/Territory capital cities. (Darwin, Perth, Sydney, Melbourne, Hobart, Brisbane, Canberra and Adelaide).

Data are released quarterly and, since 2022, monthly. Quarterly inflation data measure the year-over-year change in the index relative to the same quarter twelve months previously. Monthly inflation data measure the year-over-year change in the index relative to the same month twelve months previously.

The consumer price index is the most widely followed indicator of inflation. An investor who understands how inflation influences the markets will benefit over those investors that do not understand the impact. In countries such as Australia, where monetary policy decisions rest on the central bank's inflation target, the rate of inflation directly affects all interest rates charged to business and the consumer.

Inflation is an increase in the overall prices of goods and services. The relationship between inflation and interest rates is the key to understanding how indicators such as the CPI influence the markets - and your investments. Inflation (along with various risks) basically explains how interest rates are set on everything from your mortgage and auto loans to Treasury bills, notes and bonds. As the rate of inflation changes and as expectations on inflation change, the markets adjust interest rates. The effect ripples across stocks, bonds, commodities, and your portfolio, often in a dramatic fashion.

By tracking inflation, whether high or low, rising or falling, investors can anticipate how different types of investments will perform. Over the long run, the bond market will rally (fall) when increases in the CPI are small (large). The equity market rallies with the bond market because low inflation promises low interest rates and is good for profits.

For monetary policy, the Reserve Bank of Australia generally follows the annual change in the consumer price index. It has an inflation target of 2 percent to 3 percent. The RBA also has two preferred core or analytical measures - the weighted and trimmed means. The trimmed mean is a method of averaging that removes a small percentage of the largest and smallest values before calculating the mean. After removing the specified observations, the trimmed mean is found using an arithmetic averaging formula. The weighted mean excludes certain items from the CPI basket (the exclusion approach). Typically, the excluded items are those that are volatile and/or display pronounced seasonal patterns, and those that are subject to administrative price setting.