Inflation turned out a smidgin faster than expected in the December quarter, leaving the decision on monetary policy next Tuesday finely balanced.

The consumer price index (CPI) rose by 0.5 per cent in the December quarter after an increase of 1.0 per cent the quarter before, the Australian Bureau of Statistics said on Wednesday.

The annual inflation rate, which had declined every quarter since peaking at 5.0 per cent in the year to the September 2008 quarter, picked up to 2.1 per cent from the 10-year low of 1.3 per cent previously.

The Reserve Bank of Australia (RBA) monitors two measures of underlying inflation, which cut through quarterly volatility to give a better guide to the current inflationary trend.

Those two measures posted quarterly increases averaging 0.65 per cent, with annual underlying inflation of 3.4 per cent on average, the slowest for just over two years.

In its quarterly monetary policy statement in November the RBA forecast - rounding to the nearest quarter of a percentage point - CPI inflation of 2.0 per cent and underlying inflation of 3.25 per cent.

So the figures released on Wednesday were only slightly higher than the RBA had expected three months ago.

The outcomes were also only hair’s breadth above economists’ forecasts, which had been centred on quarterly rises of 0.4 per cent for the CPI and 0.6 per cent of the underlying measures.

Despite that, the figures have prompted a revision of the expectations for interest rates embodied in the futures market.

Cash rate futures now imply an almost three in four chance of an increase in the cash rate to 4.0 per cent from 3.75 per cent on Tuesday, compared with about two in three earlier.

This is a reasonable presumption.

The RBA forecasts, although still on track, were framed on the basis of an assumed upward trend in the cash rate.

And other indicators, most importantly the monthly labour force data showing unemployment stopped rising in June last year, confirm the economy has sustained a recovery.

As a result, the RBA board’s monthly monetary policy meeting next Tuesday will focus on managing the inflationary pressures stemming from the recovery, rather than guarding against the threat of recession that has already been seen off.

There are no guarantees, though.

The underlying rate is heading lower and the headline rate is still near the bottom of the RBA’s two to three per cent target range, so the central bank may institute a slower pace of rate rises.

That might start with a pause this month, but given that the board did not meet in January, there has already been a one-month break, it would seem more logical to save the next pause for March.

AAP