By Stella Qiu
SYDNEY, Feb 25 (Reuters) - Australian consumer prices rose by more than expected in January, while core inflation hit the highest in over a year, an uncomfortable outcome for policymakers that raises the risk of another hike in interest rates.
The Australian dollar gained 0.2% to $0.7073, while three-year government bond futures fell 4 ticks to 95.71. Investors raised bets of a rate hike in May from the Reserve Bank of Australia to 80%, up from 76% before the data.
Data from the Australian
Bureau of Statistics out on Wednesday showed its monthly consumer price index (CPI) rose 0.4% in January, from the previous month, driven by higher costs for housing, health and clothing. The figure topped the median forecast of 0.3%.
The annual pace stayed elevated at 3.8%.
The trimmed mean measure of core inflation increased by 0.3% in the month, taking the annual rate to a 16-month high of 3.4%, from 3.3% in December - keeping the rate above the RBA's target band of 2%-3% for the seventh straight month.
The central bank was forced to raise interest rates by 25 basis points earlier this month to 3.85% after inflation reared its head again following three rate cuts last year. The economy was also bumping against its speed limit as the labour market stayed tight.
The RBA had expected headline inflation to pick up to 4.2% by June this year, and the trimmed mean measure to rise to 3.7%.
Swaps now imply a total tightening of 40 basis points this year, equivalent to about one and a half rate hikes.
"We see a risk that the RBA turns more hawkish and exceeds market rate expectations," said Wee Khoon Chong, APAC macro strategist at BNY.
"Tight labour market conditions and elevated wage growth, alongside ongoing inflationary pressures, are likely to keep the Reserve Bank of Australia on a tightening path."
Michael Plumb, head of economic analysis at the bank, on Tuesday reiterated concerns about pockets of sticky inflation, while floating the prospect of ultimately shifting to a monthly measure of core inflation for policy.
RBA Governor Michele Bullock will have a chance to react to the January CPI when appearing at a Melbourne University event on Wednesday evening.
(Reporting by Stella Qiu and Wayne Cole; Editing by Himani Sarkar and Shri Navaratnam)
