Oct. 17 (Bloomberg) -- The surge in oil prices this year isn't likely to push inflation above the Australian central bank's target rate, Treasurer Peter Costello said, highlighting a division between the government and the bank on the effects of rising energy costs.

``As long as petrol prices don't have a second-round effect and spread to the general economy, we will be quite pleased,'' Costello, 48, said in an interview in Beijing yesterday after a meeting of the Group of 20 industrial and developing countries.

Costello's comments contrast with those of Reserve Bank of Australia Deputy Governor Glenn Stevens, who said Oct. 11. that record fuel prices will stoke Australia's inflation this quarter and may lead to longer-term increases in the cost of other goods.

Central bankers are concerned that headline inflation, which has been driven by the rising price of oil, will spill over into costs of other goods and services. These so-called second-round effects include a pass-through of oil prices into wage costs.

``We are concerned that long lasting high and volatile oil prices could increase inflationary pressures, slow down growth and cause instability in the global economy,'' said the G-20, which includes advanced economies such as the U.S., Germany and Japan and developing countries such as China and Saudi Arabia.

Australia's consumer price index, the official measure of inflation, for the three months ended Sept. 30 will be released on Oct. 26. The index rose 2.5 percent in the second quarter from a year earlier. The central bank aims to keep annual inflation in Asia's fifth-biggest economy between 2 percent and 3 percent.

Inflation Target

The bank raised its benchmark interest rate a quarter of a percentage point in March to a four-year high to curb inflation. Twenty of 22 economists surveyed by Bloomberg News said the central bank would leave rates unchanged for 2005.

Rising fuel costs are already prompting some Australian companies to pass price increases on to consumers.

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.

The gain in fuel costs was also behind a drop in confidence among the nation's consumers to the lowest level in 2 1/2 years in October.

Pump Prices

A recent decline in oil prices may ease some pressure on prices. Crude oil price futures have declined 12 percent since reaching a record of $70.85 in New York on Aug. 30.

The average price of unleaded gasoline in Australia fell to A$1.26 a liter in the week ended Oct. 9 from A$1.29 at the end of September, according to prices from the Australian Institute of Petroleum. Gasoline prices have increased 36 percent since the beginning of the year.

``There has been a little bit of relief,'' said Costello.

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.

Prices paid by U.S. consumers jumped last month by the most in 25 years as gasoline prices soared. Inflation in the euro region accelerated to 2.5 percent in September, exceeding the European Central Bank's 2 percent ceiling for an eighth-straight month.

Costello said prolonged high petrol prices would affect consumer demand in the A$700 billion ($525 billion) economy. In May, the Treasurer forecast the Australian economy would grow 3 percent in the year ending June 30, 2006.

China Demand

``We have no doubt that prolific high petrol prices will affect consumer and other areas, but we have not seen it yet,'' Costello said. ``That is our economic forecast and we won't be changing anything.''

Australia's economy grew at its fastest pace in 1 1/2 years in the second quarter, expanding 2.6 percent from a year earlier as miners such as BHP Billiton invested more to extract coal, iron ore and copper to meet demand in China.

``My view on the Chinese economy is that it has a long way to run,'' Costello said. ``The emergence of China has benefited the prices of energy commodities and it has been good for our exporters.''

Australia is in negotiations for a free-trade agreement with China, its second-largest goods export market behind Japan. China buys Australian commodities such as iron ore and copper.

Costello would not comment on the outlook for the currency. The Australian dollar had its second weekly loss last week as evidence the economy is slowing reinforced expectations the central bank will refrain from raising rates.

To contact the reporter for this story: Gemma Daley near Beijing on gdaley@bloomberg.net

Last Updated: October 16, 2005 11:11 EDT