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Kieran Davies, chief economist at Barclays Australia, based in Sydney, said the central bank was in a bind, and that it would be forced to revise higher in February its forecasts for benign inflation–snuffing out any talk of further rate cuts, despite slow growth.

“The RBA is in a difficult position given sluggish growth, a sluggish job market and higher underlying inflation,” Mr. Davies said.

So how is it that a weak economy like Australia, which is weighed by a severe slowdown in mining investment, low confidence and weak commodity prices, can have an inflation problem?

There are a few contributing factors.

The first is the fall in the Australian dollar. The Aussie was the worst-performing major currency over the last 12 months, falling around 17% against the U.S. dollar. Drops of that magnitude must be reflected in higher import prices at some point. Tradable, or imported inflation, rose 0.7% in the fourth quarter from the third, building on a 1.2% rise in the third quarter from the second.

That rise means the price of imported goods is now adding to inflation consistently, where in 2012 and 2013 it was pulling inflation lower. The Aussie dollar had been trading near record highs in 2012-13, well above parity with the U.S. dollar in that period.

The second component of the inflation riddle in Australia is homegrown. So-called non-tradable inflation, or that generated by goods and services produced locally, has been running hot for years. Some economists call it a structural problem, fearing it will take a long time to be weeded out of the consumer price index.

Non-tradable inflation rose 0.8% in the fourth quarter, adding to a long string of elevated results that date back over years.

Adam Boyton, the chief economist at Deutsche Bank , based in Sydney, says rising government charges are at the heart of the domestic inflation problem. What he terms as “government inflation” is running at annual rate of 5.7%. Inflation elsewhere in the economy is running at just 1.8%.

The list of government price hikes is long and range from environmental taxes to electricity, water and sewerage costs, coupled with higher levies on alcohol and tobacco.

“Within the CPI there are a number of components where price changes over recent years have largely been the result of government policies,” Mr. Boyton said. “While many of these are one-off policy decisions, these various ‘one-offs’ are starting to add up to a persistently high rate of government inflation.”

Boyton said the problem has all the hallmarks of being a long-term structural problem for the economy, but that things could change quickly if all levels of government recommitted to delivering services in a more cost-effective way.



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