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Australia Core Inflation Accelerates as Currency Restraint Wanes

Australia’s core consumer price growth accelerated last quarter and the cost of imported goods increased as the inflation-restraining influence of an elevated currency waned.

The trimmed mean gauge of core prices rose 0.5 percent from the previous quarter, the Bureau of Statistics said in Sydney today, matching the median forecast of 22 economists surveyed by Bloomberg News. The weighted-median gauge of inflation, a second core measure that excludes the largest price increases and declines, advanced 0.7 percent, compared with economists’ estimates for a 0.5 percent gain.

The Reserve Bank of Australia reduced borrowing costs seven times -- for a total of 2 percentage points -- since November 2011 as the local dollar’s strength dragged on growth and a mining investment boom crests. The currency declined 12 percent last quarter, sending imported goods prices higher, and the central bank said last week the inflation outlook is now “slightly higher” as a result.

“It’s a bit of a mixed bag really,” said Stephen Walters, JPMorgan Chase & Co.’s chief economist in Australia, who expects the RBA to hold rates steady next month. “A middle of the road inflation outcome doesn’t really scream ‘rate cut’ to me.”

Rate Bets

Traders priced in a 64 percent chance the RBA will lower borrowing costs by a quarter percentage point next month to 2.5 percent after today’s release, down from 73 percent yesterday, according to swaps data compiled by Bloomberg.

The currency, which held above $1 from mid-June last year to May 10, initially strengthened after the report to 93.19 U.S. cents, before declining after China’s manufacturing weakened further in July. The Aussie bought 92.58 U.S. cents at 12:23 p.m. in Sydney.

The consumer price index gained 0.4 percent from the previous three months, compared with economists forecast for a 0.5 percent increase.

Non-tradables, or domestic inflation for goods and services that aren’t imported such as fast food and utilities, climbed 0.5 percent from the first quarter, the report showed. Tradables, such as imported electrical goods and clothing, increased 0.3 percent, the first gain in three quarters.

The Aussie retreated 12 percent in the three months through June, the biggest slide worldwide behind the Syrian pound, after the RBA cut rates in May and U.S. Federal Reserve Chairman Ben S. Bernanke signaled for the first time on May 22 that a tapering of bond purchases that have devalued the greenback may be on the cards as the world’s largest economy strengthens.

Currency Adjustment

“Given the exchange rate adjustment that was occurring, and with the substantial degree of monetary stimulus already in place, members assessed the current stance of policy to be appropriate,” the RBA said July 16 in minutes of its policy meeting at which it held the cash rate steady. The inflation outlook was “slightly higher” due to the Aussie’s recent drop, it said.

Today’s report showed medical and hospital service prices rose 3.4 percent, while tobacco prices climbed 3 percent and furniture increased 4.8 percent. Rents increases 1.1 percent.

Domestic holiday travel and accommodation prices declined 4 percent and fuel costs fell 3.1 percent, it showed.

On an annual basis, the trimmed mean gauge advanced 2.2 percent, compared with economists’ forecasts for a 2.1 percent gain. The weighted median increased 2.6 percent versus an estimated 2.4 percent rise, today’s report showed.

The central bank aims for inflation of between 2 percent and 3 percent on average. The CPI increased 2.4 percent in the second quarter from a year earlier, compared with economists’ forecast a 2.5 percent increase.

Rebalancing Act

The statistics bureau also released a seasonally adjusted consumer price index that showed an 0.5 percent increase last quarter, for an annual gain of 2.3 percent.

The RBA is trying to rebalance the economy as investment wanes, and stimulate growth in manufacturing, residential construction and retail in the south and east.

“At present inflation is not an issue, meaning that rates can stay lower over the near term,” said Savanth Sebastian, an economist in Sydney at a unit of Commonwealth Bank of Australia. “However, the medium-term outlook for inflation has certainly shifted higher. The lower Australian dollar is likely to result in a lift in imported inflation over coming quarters.”

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