Aust price jump likely to cap rate cut

Costello: Inflation is in check

By Staff and wire reports

SYDNEY, Australia -- An unexpected spike in Australian consumer prices in the first three months of the year has put paid to speculation that the Reserve Bank could cut interest rates again next week.

Special factors affected the quarter and inflation is not trending higher, according to Australian Treasurer Peter Costello.

He said the consumer price index figure of 1.1 percent in the March quarter showed that inflationary trends were "in check".

Analysts said the Reserve Bank would be reluctant to ease rates so soon after the disappointing piece of data.

The 1.1 percent rise in the March quarter CPI, a broad measure of the cost of living, was well up on the 0.3 percent rise in the December quarter and almost double expectations of a 0.6 percent rise.

Special factors sent food prices higher

But Costello said there were special factors that, if excluded, would cut the rise to 0.6 percent.

He said these factors included higher fruit and vegetable prices resulting from supply being restricted by floods in New South Wales and Queensland, and the lifting of global meat prices following the foot-and-mouth outbreak in Europe.

He said those special factors would wind down in future quarters.

"It will reduce the chance of the Reserve Bank moving at the May meeting," said HSBC senior economist Anthony Thompson, but he added it would not be too concerned given the global outlook and softer domestic demand.

The RBA has already cut interest rates three times this year, most recently on April 4 when it brought the overnight cash rate down half a percentage point to 5.0 percent. Analysts still expect another rate cut in coming months.

The 3.3 percent increase in food prices was the largest in about a decade, and pharmaceutical and education costs were also sharply higher.

Inflation unlikely to trend higher

Over the year to March, inflation rose by 6.0 percent, including about a three percent component for the goods and services tax introduced in July last year.

But with the economy slowing, inflation is unlikely to trend higher. Upstream price indicators have also pointed to sharply waning price pressures in coming months as energy costs eased.

Core inflation, which excludes one-off items like the GST and petrol prices, is still running in the bottom half of the Reserve Bank's 2-3 percent target band.

Reuters contributed to this report.

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