Inflation data released yesterday shows that the case for another rate hike is undeniable. The TD Securities/Melbourne Institute monthly inflation gauge rose 0.3% in December, meaning that it increased 3.8% for the 12 months to December. This latest jump comes after the RBA hiked the cash rate by 25 basis points to 6.25% in early November.

The main drivers behind this latest rise in inflation were higher fuel, meat and computer prices. The latest high inflation result means that inflation has been at or above the top end of the RBA’s target range since March 2006, and does not look likely to fall back in the near future.

TD Securities chief strategist Stephen Koukoulas said these figures will concern the RBA:

The case for a further monetary tightening is strong – even compelling… The official inflation data on January 24 and the next monthly inflation result on February 5 will obviously be important in determining the timing of the RBA action. The RBA could decide to hike rates at its February 6 meeting if these next inflation results are high.

The TD Securities – Melbourne Institute gauge showed core prices, excluding volatile fuel, fruit and vegetables, rose 0.2% in December. Core inflation for the year rose to 2.9%, from 2.7%.

The trimmed mean of the TD-MI gauge, a statistical measure of underlying inflation, rose 0.4% in December. Growth for the year accelerated to 3.1%, from 2.6% in November.

The result also contradicts prominent but silly theories that the main driver behind 2006 inflation was just bananas – the price of bananas fell by 40% during December.

Of course, we would be in a better position if the RBA had followed Henry’s advice in November, but the odds of a rate hike in February or March are now shorter.

Read more at Henry Thornton.