Australia's Inflation Accelerates

Australian inflation accelerated in the second quarter to the fastest pace in two years, adding to pressure on the central bank to leave borrowing costs at a 12- year high.

The consumer price index rose 1.5 percent from the first quarter, when it gained 1.3 percent, the Bureau of Statistics said in Sydney today. The median estimate in a Bloomberg News survey of 22 economists was for 1.3 percent. Prices gained 4.5 percent from a year earlier.

A surge in prices, stoked by a 71 percent jump in the cost of crude oil in the past 12 months, gives central bank Governor Glenn Stevens little scope to cut borrowing costs even as the nation's 17-year economic expansion slows. Stevens raised the benchmark interest rate to 7.25 percent in March to try to bring inflation back within his target range of 2 percent to 3 percent.

The Australian dollar rose to 97.22 U.S. cents at 11:38 a.m. in Sydney from 97.11 cents immediately before the report. The yield on the benchmark two-year government bond fell 1 basis point to 6.62 percent. A basis point is 0.01 percentage point.

Stevens faces the same challenge as policy makers around the world in balancing higher inflation with slowing economic growth. Consumer prices in the U.S. surged 5 percent in the year through June, the biggest jump since 1991, and in Europe they climbed 4 percent, the fastest pace in more than 16 years.

Financial and insurance costs rose 3.8 percent in the second quarter and transport gained 3.1 percent, while clothing and shoes jumped 3 percent, today's report showed. By contrast, recreational costs fell 0.2 percent and food slid 0.1 percent.

While the consumer price index ``might rise further before it starts to come down,'' central bank policy makers ``still expect inflation to fall back to 3 percent by mid-2010, and to continue declining gradually thereafter,'' Stevens said last week.

The chances of keeping inflation low over the medium term are good as higher borrowing costs cool the $1 trillion economy, which expanded at the slowest pace in almost two years in the first quarter, he said on July 16.

The Reserve Bank of Australia left borrowing costs unchanged on July 1 for a fourth month to assess fallout from the global credit squeeze and rising gasoline costs that have eroded household incomes.

Consumer confidence slumped in July to the lowest level in 16 years, businesses were the most pessimistic in June since 2001 and home-loan approvals fell in May by the most in eight years.

Today's report includes the Reserve Bank's core inflation measures, which exclude the largest price gains and declines. The weighted-median gauge of inflation rose 1 percent in the quarter for an annual increase of 4.5 percent. Economists forecast 1.1 percent and 4.4 percent respectively.

The same gauge surged in the first quarter to the fastest pace since 1991, boosted by rising energy costs.

Inflation is also being fanned by rising wages as mining companies such as Rio Tinto Group and BHP Billiton Ltd. compete for skilled workers to help meet demand from China for iron ore and other commodities.

Unemployment fell to 3.9 percent in February, the lowest level in more than three decades. The rate was 4.2 percent last month.

Prices paid to Australian producers rose less than economists forecast in the second quarter. The producer price index advanced 1 percent, a report showed this week.


Australia, Bloomberg
7/22/2008 7:05:59 PM