Australian Inflation Reaches 5%, Fastest Since 2001

By Jacob Greber

Oct. 22 (Bloomberg) -- Australia's annual inflation accelerated in the third quarter to the fastest pace since 2001, driven by costs for housing and food.

The consumer price index jumped 5 percent from a year earlier, the Bureau of Statistics said in Sydney today. Prices rose 1.2 percent from the second quarter, when they gained 1.5 percent. The median estimate in a Bloomberg survey of 16 economists was 4.8 percent and 1 percent respectively.

The surge in prices may limit the size of the central bank's potential interest-rate reductions in coming months. Governor Glenn Stevens cut the benchmark rate by 1 percentage point this month to 6 percent, the biggest reduction since a recession in 1992, to cushion the economy against a global credit squeeze that has roiled financial markets.

``While the Reserve Bank is more focused now on preventing recession than dealing with inflation, it certainly can't afford to be complacent,'' said Craig James, a senior economist at Commonwealth Bank of Australia. ``The longer it remains above the 2 percent-to-3 percent target band, the greater the risk that it becomes entrenched at high levels.''

The Australian dollar traded at 67.85 U.S. cents at 12:30 p.m. in Sydney from 67.92 cents before the report was released. The two-year government bond yield fell 1 basis point, or 0.01 percentage point, to 4.23 percent.

Housing, Food

Housing costs climbed 2.6 percent in the third quarter, financial services gained 1.7 percent and food and alcohol increased 1.4 percent, today's report showed. Clothing fell 0.7 percent.

While inflation is ``likely to remain high in the period immediately ahead,'' there are increasing signs the economy's 17-year expansion is slowing enough to contain future price gains, Stevens said yesterday.

``Forces seem now to be building that will start to dampen pressures on prices -- even though we won't have evidence of that for a good six months,'' Stevens told a business function in Sydney.

Central bank policy makers aim to keep annual price gains between 2 percent and 3 percent on average, and seek ``to respond to the medium-term outlook for prices, not just the current data,'' Stevens said yesterday.

Economy Slowing

The annual 5 percent jump in consumer prices in the third quarter was the biggest rise since the second quarter of 2001, when prices jumped after the introduction of a tax on goods and services. Excluding that period, today's surge was the biggest since 1995.

Stevens expects inflation will slow in 2009 as Australia's economy cools as consumers cut spending and banks reduced lending to home-buyers and businesses.

Gross domestic product grew 0.3 percent in the second quarter, the slowest pace in more than three years, as consumer spending contracted for the first time since 1993.

The jobless rate rose to 4.3 percent last month from 4.1 percent in August. Lending by banks to home buyers gained 0.4 percent in August, the smallest monthly increase in 22 years, and residential building approvals fell for a second month.

The nation's jobless rate will more than double to 9 percent in late 2010 as slower economic growth in China, the nation's largest trading partner, prompts companies to fire workers and cut investment, JPMorgan Chase & Co. Chief Economist Stephen Walters said in Sydney today.

`Prices Have Peaked'

``The increased downside risks to growth and the improved prospects for lower inflation meant that there was a strong economic case'' for this month's 100 basis point rate reduction,'' central bank board member said in minutes of their Oct. 7 meeting, published yesterday.

Treasurer Wayne Swan said the surge in annual inflation in the third quarter ``is the peak.''

``We would hope to see it moderate over the year ahead,'' Swan told reporters in Canberra. ``If you look at commodity prices and global growth, I think that is an accurate position.''

The central bank will cut borrowing costs by another 50 basis points when it meets on Nov. 4, according to 14 of 16 economists surveyed by Bloomberg News this week. One expects a quarter-point reduction and one tipped three-quarters of a percent.

Today's report suggests inflation ``is a touch higher than the Reserve Bank's forecast track'' for prices, which are expected to peak in the fourth quarter, said David de Garis, a senior economist a National Australia Bank Ltd. in Sydney.

Core Inflation

Policy makers will cut borrowing costs ``by no more than half a point'' in November, with a quarter-point reduction a ``lesser but possible outcome,'' De Garis added.

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 1.3 percent in the quarter for an annual increase of 4.8 percent. Economists forecast gains of 1 percent and 4.5 percent respectively.

The central bank forecast in August that the consumer prices index would peak at 5 percent in the fourth quarter, before falling below 3 percent during 2010.

To contact the reporter for this story: Jacob Greber in Sydney at jgreber@bloomberg.net