Oct. 11 (Bloomberg) -- Record fuel prices will stoke Australia's inflation rate in the third quarter and may lead to longer-term increases in the cost of other goods, central bank Deputy Governor Glenn Stevens said today.

Rising investment by mining companies and higher commodity export prices are spurring the Australian economy, in its 14th year of expansion, at a time when consumer spending and home building are cooling, said Stevens, who is a member of the bank's interest-rate setting board.

Stevens said the key issue for both the Australian and global economies is the inflationary pressure caused by record oil prices, which have risen 43 percent this year. The threat of inflation spurred by rising fuel costs has prompted central banks in South Korea, Indonesia, Thailand, Taiwan and the Philippines to increase interest rates this year.

``The direct impact of the recent high energy prices will presumably be evident'' in Australia's third-quarter inflation rate, Stevens said, according to speech notes for delivery to the Tasmanian Chamber of Commerce & Industry in Hobart. ``Over a somewhat longer horizon, there might be some indirect impacts of higher energy costs, through the transport system for example.

``Just how big these turn out to be will presumably depend on whether demand conditions allow businesses simply to pass on energy and transport cost increases, as opposed to absorbing them by finding offsetting cost savings or accepting narrower profit margins.''

Milk, Cheese

Higher oil prices are raising costs for Australian companies. Dairy Farmers Group, the nation's largest dairy cooperative, and National Foods Ltd., said they are raising milk, yoghurt and cheese prices by as much as 8 percent because of higher costs. More expensive jet fuel prompted Qantas Airways Ltd., the country's biggest airline, to increase ticket prices.

Australia's consumer price index, the official measure of inflation, for the three months ended Sept. 30 will be released on Oct. 26. The consumer price index rose 2.5 percent in the second quarter from a year earlier, within the central bank's 2 percent to 3 percent target range for annual inflation.

The Bank of Korea today raised its overnight call rate to 3.5 percent from a record low 3.25 percent to curb inflation in Asia's third-largest economy.

``The issue before us in the next year or two is whether the world and Australian economies can adapt to higher energy and resource prices without a significant bout of inflation,'' Stevens said, adding the Reserve Bank of Australia would release an updated inflation assessment on Nov. 7 in its quarterly monetary policy statement.

U.S. Economy

``For the moment, what is remarkable is that the rise in raw material prices over several years has not already pushed inflation rates up more than it has.''

The U.S. economy, the world's largest, ``continues to expand at a good pace'' and the impact of hurricanes Katrina and Rita haven't been ``particularly large,'' said Stevens.

``Japan looks more likely to be able to sustain growth now than at any time in over a decade,'' he said. Japan is Australia's largest export market. Exports account for about one-fifth of Australian economic production.

``Higher oil prices do reduce growth compared with what might have been possible had the supply of oil been perfectly elastic,'' Stevens said. ``But even with that reduction the world economy is recording quite good growth.

``Unlike many industrialized economies, there is also a major positive side for the Australian economy in higher prices for energy and raw materials,'' he said. ``For those with an income stake in the extraction of these resources, times are very good indeed.

`Considerable Buoyancy'

``There can be little doubt that this adds considerable buoyancy to the economy, which would not otherwise be there.''

Last week, the central bank kept its overnight cash rate target unchanged at 5.5 percent for a seventh month as reports showed consumer confidence slumped to a two-year low, exports fell and building approvals dropped to the lowest since 2001.

``The gradual correction of the housing excesses of the early part of this decade has gone well so far,'' Stevens said. ``It is our good fortune that this is unfolding alongside a global scene which is quite favorable at present.

``Consumption spending has been proceeding in a more moderate fashion,'' he said.

Borrowing has slowed, though ``the rate of growth of outstanding credit remains, if anything, somewhat higher than one would expect to be a sustainable pace in the long run.''

Nine of 22 economists surveyed by Bloomberg News expect an Australian interest-rate increase by June 2006, three forecast a cut and 10 expect borrowing costs to be unchanged in that period.

Business investment surged 6.8 percent in the second quarter, helping the economy grow at its fastest pace in 1 1/2 years. The economy expanded 1.3 percent in the second quarter, more than double the 0.5 percent growth in the first quarter.

To contact the reporter for this story: Victoria Batchelor in Sydney at vbatchelor@bloomberg.net.

Last Updated: October 11, 2005 04:15 EDT