Contrary to expectations of a 0.7% increase in inflation over the quarter, headline inflation came in at 0.9%, translating to a 3.9% increase in the general level of prices. This is well in excess of the Reserve Bank's comfort zone of 2-3% inflation annually. Given that petrol prices subsided somewhat during the September quarter, what has been fuelling inflation? While the one-off effect of Cyclone Larry has just about run its course, the drought and other crises to hit farmers including severe frosts is pushing up prices of fresh fruit and vegetables. Indeed, it is the 'core items' on which we rely in our daily lives that are of most threat to rising inflation. Mortgage broking franchise Australian Finance Group discovered exactly this after conducting a survey of broker sentiment recently. The survey found that broking customers were equally worried about the cost of non-discretionary household items including food and fuel than the prospect of another rate rise, which the lion's share of economists are predicting by the end of 2006. "People see immediate impacts of rising petrol and fresh food prices - these are expenses that hit you every week and have a much greater effect on their lifestyle. It's largely a psychological effect - people tend to respond by putting off larger expenditure items such as that holiday or home renovation," says executive director of AFG, Malcolm Watkins.

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