The cost of living rose by 4.5 per cent in the past financial year, Bureau of Statistics figures show, boosted by record petrol prices, the biggest rental increases since 1989, higher bank fees and margins, rising health premiums and the Federal Government's tax increase on alcopops.

However, the Reserve Bank is expected to remain on the sidelines, having already inflicted interest rate pain and given tentative signs that underlying inflation may have peaked.

A study to be released today by AMP and the National Centre for Social and Economic Modelling reveals that higher housing costs are hitting middle-income households especially hard, completely erasing income gains for some families.

"The results make it clearer why so many Australians feel overwhelmed by their housing costs and are unsure whether they really are much better off today than at the beginning of the decade," the report says.

Housing costs - including mortgage and rent payments - for the average household rose 62 per cent between 2001 and 2006, or by $76 a week to $199 a week.

The average pretax household income also rose, by 31 per cent, but the higher cost of housing whittles this back to a 26 per cent increase. While this may seem large, the increase required simply to keep pace with inflation was 14 per cent, suggesting lean gains in real household incomes.

Sydney households were hit particularly hard, with an income gain of 28 per cent reduced to 22 per cent by housing costs, meaning real incomes rose only 1.5 per cent a year.

"While the economic boom did result in across-the-board increases in gross income for the nation, the escalation in housing costs dampened the effective improvements in living standards," the reports says.

A "hollowing out" was occurring because middle-income households were being hit harder than high- and low-income households by rising housing costs. The proportion of middle-income households owning their homes fell from 40 per cent to 33 per cent.

Inflation figures released yesterday show the cost pressures facing households. Increased petrol prices and bank fees and charges accounted for almost half the 1.5 per cent increase in prices in the June quarter. Petrol prices rose 8.7 per cent in the quarter and 18.4 per cent annually.

There was a steep rise of 9.5 per cent in costs associated with the difference between interest earned on loans and interest paid to deposit-holders - thanks to a one-off revision by the bureau - and banks seeking to recoup higher foreign credit costs.

Alcoholic spirit prices jumped 6.1 per cent - the fastest pace since records began in 1980 - due to the Government's increases in excises on premixed drinks on April 27. The annual increase was 5.2 per cent.

The Treasurer, Wayne Swan, said the Government would continue to build strong budget surpluses to combat inflation. "There's no point in trying to sugar-coat it at all," he said. "It's a very substantial problem."

Renters are feeling the squeeze. Rents rose at their fastest quarterly pace since 1989, 2.2 per cent, for an annual rise 7.7 per cent.

Annual rises in private health insurance premiums increased health and medical service costs by 4 per cent in the quarter. The annual increase was 6.1 per cent.

However, food prices fell slightly in the quarter, thanks to declining prices for fruit and vegetables, caused by surpluses.

However, in the past year there were steep increases in the costs of some foods, including milk (up 12.1 per cent), cheese (up 14.2 per cent) and poultry (up 11 per cent).

The end of Christmas and summer sales discounts caused a rebound in the cost of household goods, including furniture (up 3.1 per cent), towels and linen (up 3.8 per cent), major household appliances (up 1.8 per cent) and clothing and footwear (up 3 per cent).

The Reserve Bank was expecting yesterday's horror inflation numbers and it is still more likely that its next move will be to cut interest rates, not raise them.

Supporting this view, a measure of core inflation - which strips out one-off price movements - recorded its first slowing in nearly two years, rising 1.1 per cent in the quarter, down from 1.25 per cent in the previous quarter.

While this is still unacceptably high, the Reserve Bank is confident a slowdown is under way.

The main risk is that the economy may slow too much because of independent interest rate rises inflicted by commercial banks and other lenders.