Despite yesterday's higher than expected inflation figures, does anyone seriously expect the Reserve Bank to lift interest rates next Tuesday?

Certainly all that silly talk about a rate cut has been exposed for what it was: nonsense, even though Westpac was sticking to its call yesterday.

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But seriously, what chance Westpac's rate cut forecast by the end of this year being met now after the 0.9% rise in the June quarter CPI?

But that aside, consider the timing of the RBA board meeting: next Tuesday night is the deadline for a debt ceiling deal in the US.

If a deal is done between now and then, financial markets will be reassured to an extent.

But with the debt ceiling deal conditional on a spending and taxing package being agreed to by an irrevocably split US Congress, the chances of agreement are looking increasingly remote.

And even if a deal is achieved, it still has to be implemented, where a deal could fall apart by rebellious Republicans in the US House of Reps.

But even if an agreement sticks, America will likely see its AAA credit rating come under pressure from ratings groups.

One or possibly two groups might cut the rating, a move that will also unsettle markets.

And if no deal is done, then the spectre of default and the downgrading escalates and financial markets tremble.

So why would the RBA upset Australian markets on Tuesday and lift rates, if the situation in America is already sending markets mad with uncertainty, and pushing the value of the Aussie dollar higher, as it has done this week?

It's against that background (and a steady renewal of fears about the eurozone) that the RBA board will meet next Tuesday and decide on whether to lift interest rates.

Normally rates would have risen in May when the RBA changed tack on inflation, but it held back as the local economy weakened and the eurozone crisis returned to the picture.

On top of that it knows the domestic economy remains weak and the price pressures are still mostly coming from the first quarter flooding and cyclone in Queensland, plus the sharp rise in oil and petrol prices in the quarter.

Both are one-offs, but both caused considerable disruption in the quarter and first six months of 2011.

And they helped the 0.9% rise in the headline CPI in the June quarter surprise markets that had been looking for an increase around 0.7%).

The Australian Bureau of Statistics said quarterly rise was down from the 1.3% rise in the March quarter, but it boosted the annual rate to 3.6% as fruit (those bananas again) and higher petrol prices combined to boost the costing of living for a second quarter in a row.

The Australian dollar jumped a full US cent on the news, surging past $US1.10 to $US1.1073, a new post-float record for the local unit.

That built on the surge already generated by the sell-off in the US dollar amid fears about the debt ceiling impasse.

The ABS said the most significant price rises this quarter were for fruit (+26.9%), automotive fuel (+4.0%), hospital and medical services (+3.4%), furniture (+6.0%) and deposit and loan facilities (+2.1%).

"The most significant offsetting price falls were for vegetables (-10.3%), audio, visual and computing equipment (-6.3%), electricity (-1.5%), domestic holiday travel and accommodation (-1.5%) and milk (-4.6%).

"Fruit prices increased by 26.9% in the June quarter 2011 mainly due to an increase of approximately 138% in the price of bananas due to shortages created by Cyclone Yasi. Banana prices increased 470% over the six months to the June quarter 2011."

Perth led the capital cities for price rises with a 1.3% rise in the quarter. Prices rose by 1% in Sydney, Brisbane, Adelaide and Darwin in the same period.

In Hobart prices rose 0.9%, while Melbourne experienced the smallest rise of 0.7%.

The RBA's underlying rate also rose during the June quarter with its two measures, the trimmed mean and the weighted median higher.

The two measures rose an average 0.9% in the quarter, up slightly from the 0.85% increase in the March quarter.

(Annualised the quarterly rate, based on the last two quarters, is running at 3.5%, which is well above the RBA's range and comfort.)

The trimmed mean rose from 2.3% to 2.7% over the year to June, while the weighted median rose from 2.2% to 2.7%.

The 2.7% average of the two key gauges remains within the 2%-3% target range of the RBA.

The RBA also looks at the split between the rise in the tradables part of the CPI (that's the cost of goods and services largely determined on world markets) and non-tradables (prices determined domestically). The tradables CPI was up a sharp 1.3% in the June quarter, the non -tradables rose 0.6%. Both rose 3.6% in the year to June.

So not much joy there.

If the RBA stays it hand next Tuesday, watch for a September rate increase if the US situation improves, as it surely must.

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