THE announcement of the September quarter's consumer price index brought a small wave of hope that official interest rates could now be cut by the Reserve Bank on Melbourne Cup day.
The reason? Wednesday's consumer price index - the main indicator of inflation - came in at 2 per cent for the year, which means underlying inflation should still be at the ''low'' end of the RBA's 2 per cent to 3 per cent inflation target.
And given this low inflation figure, there is room for the RBA to further cut the cash rate to 3 per cent before Christmas, encouraging borrowing and spending.
But I've been looking at the numbers and talking with economists since the CPI announcement and we can't assume the Reserve Bank will rush to reduce rates.
I'm happy to be proved wrong, however, in the balance of probabilities, I believe the Reserve Bank board is more likely to leave interest rates where they are and wait for the December quarter's CPI figures in January, which means the next rate movement could be in February.
Many readers will be annoyed with this analysis, but here is my thinking.
The annual CPI of 2 per cent represented a jump from the June quarter's 1.2 per cent. There was also a jump of 1.4 per cent between June and September, almost three times the rise between March and June. So inflation is rising.
In the breakdown of the September CPI, electricity rose by 15.3 per cent, and ''gas and other household fuels'' by 14.2 per cent.
These cost-of-living increases are not demand driven and have more to do with policy and regulatory settings. Given this, I believe the RBA will want at least two quarters of price data on power and gas before deciding where they fit into underlying inflation.
Second, even if we forget the cost of power and gas, we can see increases in other basics, such as vegetables (up more than 10 per cent); housing (up 4.7 per cent); education (up 6.1 per cent); and health (up 7.2 per cent in the year to September). These are direct cost-of-living pressures and the RBA will want to ensure its next move is the right one.
Why does it need to get this right? Because if it cuts interest rates and further encourages cost-of-living increases, it will potentially push the economy in the wrong direction.
There's another reason why I think the Reserve Bank will hold interest rates over the holidays and wait for the December CPI: economists themselves have already backed away from predicting a November rate cut.
Before the CPI announcement, 80 per cent of polled economists predicted a Cup day rate cut. Now it's 60 per cent.
Many who bought property before the global financial crisis and are carrying large debt loads want every rate cut they can get. However, rather than living in hope, it's better to understand the role of the Reserve Bank: to be informed about where it fits in.
The Reserve Bank is an independent agency charged with various duties under its constitution, including the issuance of currency, the operation of the financial system, the integrity of the payments system, and oversight of gold and foreign exchange reserves.
Its broader mission concerns prices, employment and general economic prosperity, which it does ''by setting the cash rate to meet a medium-term inflation target''.
This is the crucial element in its monthly deliberations on the cash rate: to set the cost of money at a level that keeps Australia's inflation rate inside the optimal range of 2 per cent to 3 per cent. This is the ''Goldilocks'' formula, where inflation is not too hot and not too cold; where the economy is not stagnant but not too exuberant.
Using the cash rate, the Reserve Bank changes the cost of money to alter demand for it: cheap money equals high demand and more spending, which pushes inflation up; expensive money reduces demand for it and cools the economy by reducing inflation. This is monetary policy, which the RBA operates independent of government.
A situation can arise in which the cost of living is rising and the Reserve Bank's response is to raise interest rates, which can further increase the cost of living for mortgage holders and business owners, but the Reserve tries to avoid this. Oh, and the Reserve Bank has to juggle these factors with global trade cycles, European growth figures, Chinese industrial output and domestic credit growth.
It's a complicated task, but for now, I believe the Reserve Bank will wait for January 23, when the December quarter's CPI is released. It might be the most important number we see in the next 12 months.
Mark Bouris is executive chairman of Yellow Brick Road Wealth Management. See ybr.com.au.