Inflation is tipped to stay above the Reserve Bank of Australia's (RBA) target range in 2008 as the labour market tightens, a report shows.

But higher interest rates, with the prospect of more to come, are expected to slow Australian economic growth this year as the global economy struggles.

The Melbourne Institute Bulletin of Economic Trends predicts annual core inflation will rise by 0.2 percentage points to 3.6 per cent during the March quarter.

This keeps inflation well above the RBA's two to three per cent annual target.

"The Melbourne Institute forecast is that underlying inflation over the next three quarters will be at, or above, the RBA's target band," the report said.

The Melbourne Institute forecast comes after the RBA's quarterly monetary policy statement said underlying inflation would rise to 3.75 per cent by June 2008 as headline inflation climbed to 3.5 per cent.

The institute's report forecast that January's 33-year low jobless rate of 4.1 per cent would fall to 4 per cent by September as the labour market tightened.

"Labour conditions are anticipated to remain favourable," the report said.

"Employment is forecast to grow between 2.4 and 2.5 per cent for the next two quarters.

" ... the unemployment rates for all states are likely to fall, with the unemployment rates for Queensland and Western Australia predicted to fall below the national level."

The Australian economy is expected to post an annual growth rate of 4.1 per cent during the December quarter, a 0.2 percentage point drop from the previous quarter.

The Melbourne Institute predicted gross domestic product (GDP) growth would fall to 3.9 per cent in the three months to March 31 and 3.4 per cent by the September quarter because of the effect of higher interest rates.

However, the report says the outlook for Australia remains good.

"Forecasts for consumption growth were revised down slightly from last month mainly due to higher interest rates," it said.

World growth is expected to show few sign of rebound in 2008.

"GDP growth in Australia is usually in line with growth in other highly developed countries," the report said.

"However, while activity has remained robust in recent quarters, global growth has been slowing.

"The biggest worry is not the threat of imminent recessions, though they are possibilities, but the fact there is no sign of a rebound in world growth on the horizon."

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