Australia’s Inflation Rate Almost Doubles to 0.9%

Australia’s inflation rate almost doubled in the first quarter to 0.9 percent, making it more likely that the central bank will keep raising borrowing costs.

The increase in the consumer price index from the previous three months followed a 0.5 percent gain in the fourth quarter and was more than the median 0.8 percent expected by economists. Prices rose 2.9 percent from a year earlier, the most since late 2008, the Bureau of Statistics said in Sydney today.

Traders raised bets on the likelihood that central bank Governor Glenn Stevens will next week extend a world-leading round of interest-rate increases. Inflation pressures are building as surging investment in resources projects such as Chevron Corp.’s Gorgon gas field in Western Australia worsens a skills shortage that threatens to stoke wage growth.

“Inflation is overshooting the bank’s forecast” that consumer-price growth will fall to an annual rate of 2.5 percent by mid-year, said Annette Beacher, an economist at TD Securities Ltd. in Singapore. “The pressure on interest rates remains firmly to the upside.”

The Australian dollar rose to 91.90 U.S. cents at noon in Sydney from 91.78 cents just before the report was released. The two-year government bond yield jumped 7 basis points to 4.92 percent. A basis point is 0.01 percentage point.

Next Move

Investors are betting there is a 30 percent chance of a quarter-point increase in the overnight cash rate target to 4.5 percent at the central bank’s next meeting on May 4, according to Bloomberg calculations based on interbank futures on the Sydney Futures Exchange at noon. Prior to today’s report, the rate was 20 percent. The likelihood of a quarter-point move by early July stands at 92 percent.

Gasoline costs rose 4.2 percent in the first quarter and pharmaceutical prices advanced 13.3 percent, today’s report showed. By contrast, fruit fell 5.7 percent.

Stevens has led Group of 20 policy makers in raising borrowing costs, increasing the Reserve Bank’s benchmark rate by 125 basis points to 4.25 percent between early October and this month amid evidence economic growth is rebounding to what the governor calls its “trend rate.”

Stevens said last week that it “doesn’t seem very likely” inflation will slip below the bank’s target range of 2 percent to 3 percent, as forecast a year ago, because of rising raw-material costs, employment and fears about skills shortages.

‘Reasonable Case’

Reserve Bank of Australia Assistant Governor Guy Debelle said today that the central bank’s current target range for inflation had coincided with “strong economic outcomes over the last decade or so.”

“It seems a reasonable case to continue” it at that level “going forward,” Debelle told an audience of mortgage industry professionals in Sydney.

Economic growth in Australia, one of few nations to skirt last year’s global recession, will accelerate to 3.5 percent in 2011 from 3 percent this year, the International Monetary Fund said last week.

Consumer-price growth has fallen from its peak of 5 percent in 2008 to about 2 percent last year, a “figure that flatters us a bit as it was partly a result of some temporary factors,” Stevens said in Toowoomba on April 23.

Underlying inflation was about 2.75 percent, annualized, in the second half of 2009, according to the central bank.

“Our forecast a few months ago for 2010 was that inflation, measured either in headline or underlying terms, would be in line with our 2 percent to 3 percent target,” Stevens said.

The central bank is due to publish revised forecasts for growth and inflation on May 7.

Core Inflation

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

The weighted-median gauge of inflation advanced 0.8 percent in the first quarter for an annual increase of 3.1 percent. Economists forecast gains of 0.7 percent and 3 percent respectively.

The first quarter’s “uncomfortably high rate of underlying inflation” means policy makers will increase borrowing costs in May, said Brian Redican, a senior economist at Macquarie Group Ltd. in Sydney. “It seems clear that the inflation momentum is shifting even higher.”

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