Strong dollar keeps lid on cost of imports

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

The consumer price index rose 0.4 per cent from the July-September period, when it increased 0.7 per cent, the Bureau of Statistics said yesterday.

A Bloomberg News survey of 25 economists had estimated a 0.7 per cent median. Prices were 2.7 per cent higher than a year earlier, the smallest gain in a year.

The dollar dropped as investors bet Reserve Bank of Australia Governor Glenn Stevens could 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, at Commonwealth Bank of Australia in Sydney, wrote. Rebuilding after the floods could add to inflationary pressures.

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

Woolworths, Australia's biggest retailer, on Monday cut its full-year profit forecast, citing lower consumer confidence and "uncertainty" over inflation and interest rates.

Yesterday's report showed clothing and footwear prices fell 1.9 per cent in the fourth quarter and health costs 1.2 per cent. Food increased 2.2 per cent, while alcohol and tobacco gained 0.8 per cent.

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

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

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

Another report showed prices paid to Australian producers rose 0.1 per cent in the fourth quarter, the smallest increase in a year as the stronger currency lowered the cost of imports.

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

Finding skilled labour 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.

Already two coal-seam gas projects, expected to cost more than A$30 billion, are proceeding near the Queensland port of Gladstone. Santos, Australia's third-largest oil producer, and BG Group, the UK's third-biggest gas producer, will start hiring the first of more than 10,000 construction workers 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," Riki Polygenis, a senior economist at ANZ Banking Group, wrote.

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 per cent. The Governor and his board aim to keep inflation in a range of 2 per cent to 3 per cent on average. The RBA meets in a week to set interest-rate policy.

- BLOOMBERG