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Australian CPI Advances at Slowest Pace in Two Years

Australian consumer prices advanced last quarter at the slowest pace in almost two years as a stronger currency lowered costs for household appliances, clothing and cars from abroad.

The consumer price index rose 0.4 percent from the July- September period, when it increased 0.7 percent, the Bureau of Statistics said in Sydney today. That was less than the 0.7 percent median estimate in a Bloomberg News survey of 25 economists. Prices were 2.7 percent higher than a year earlier, the smallest gain in a year.

The local dollar dropped as investors bet Reserve Bank of Australia Governor Glenn Stevens has scope to delay raising interest rates after seven increases from October 2009 to November last year. Weaker prices at the end of 2010 may be short lived as reconstruction after floods in eastern Australia adds to wage pressure, economists said.

“The strength of the Australian dollar continues to push down prices of imported goods and services,” Savanth Sebastian, an economist at Commonwealth Bank of Australia in Sydney, wrote in a report after the release. “The floods around Australia and the resulting rebuilding phase have the potential to add to inflationary pressures in terms of building costs and sliding unemployment.”

Dollar Weakens

The Australian dollar fell after the report, fetching 99.51 U.S. cents as of 1:14 p.m. in Sydney, from 99.74 cents yesterday in New York. It has declined 2.8 percent this year, the second- worst performer among the 16 major currencies after reaching parity with the U.S. dollar in the final three months of 2010.

Australia’s S&P/ASX 200 Index extended gains after the report was released, rising as much as 0.7 percent to 4,819.90.

Australia’s economy slowed in the third quarter, with gross domestic product increasing at a 0.2 percent quarterly rate, the weakest pace since a contraction at the end of 2008. Savings as a share of disposable income climbed to 10.2 percent from July through September, from 8.9 percent in the second quarter.

Woolworths Ltd., Australia’s biggest retailer, yesterday cut its full-year profit forecast, citing lower consumer confidence and “uncertainty” over inflation and interest rates.

Today’s report showed clothing and footwear prices fell 1.9 percent in the fourth quarter and health costs dropped 1.2 percent. Food increased 2.2 percent, while alcohol and tobacco gained 0.8 percent, it showed.

Core Prices

The RBA’s core inflation measures, which exclude the largest price increases and declines, were also published today.

Core inflation, as measured by the central bank’s so-called trimmed mean gauge, rose 0.3 percent from the previous quarter and 2.2 percent from a year earlier.

The weighted-median gauge of inflation advanced 0.5 percent in the fourth quarter for an annual increase of 2.3 percent. Economists forecast a quarter-to-quarter gain of 0.7 percent and annual rise of 2.5 percent.

A report yesterday showed prices paid to Australian producers rose 0.1 percent in the fourth quarter, the smallest increase in a year as the stronger currency lowered the cost of imports, data released yesterday showed.

Australia’s dollar climbed 5.8 percent in the fourth quarter, the third-best performer among the 16 major currencies tracked by Bloomberg.

Finding skilled labor for the reconstruction in Queensland, plus the flood-damaged eastern states of Victoria and New South Wales, may become more difficult. A mining boom, to feed China’s demand for raw materials, has caused a worker shortage at a time when the jobless rate is at the lowest level since January 2009.

Mining Boom

Already two coal-seam gas projects, expected to cost more than A$30 billion ($29.8 billion), are proceeding near the Queensland port of Gladstone. Santos Ltd., Australia’s third- largest oil producer, and BG Group Plc, the U.K.’s third-biggest gas producer, will start hiring the first of more than 10,000 construction workers needed for the two projects later this year.

“The reconstruction following the Victorian and Queensland floods will coincide with an upswing in mining investment and put an additional strain on resources from mid-2011 onwards,” as subdued demand conditions for retailers,” Riki Polygenis, a senior economist at Australia & New Zealand Banking Group Ltd., wrote in a report after the release.

Stevens kept borrowing costs unchanged last month, after boosting the benchmark lending rate by 175 basis points from early October 2009, from a half-century low of 3 percent. The governor and his board aim to keep inflation in a range of 2 percent to 3 percent on average. The RBA meets in a week to set interest-rate policy.

To contact the reporter for this story: Michael Heath in Sydney at heath1@bloomberg.net.

To contact the editor responsible for this story: Stephanie Phang in Singapore at sphang@bloomberg.net

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