Australia's inflation accelerates on rising food prices

A destroyed banana plantation in Australia
Image caption Cyclone Yasi that hit Australia earlier this year caused widespread damage to plantations

Australia's consumer prices rose more than forecast in the second quarter as high cost of food and fuel put pressure on inflation.

Prices rose by 3.6% in the three months to the end of June from the same period last year, latest data showed.

Food prices have been rising due to the devastation caused by floods and cyclones earlier this year.

The Australian dollar hit a record high against the US dollar on concerns that central bank will raise interest rates.

"It's a nasty looking number," said Michael Blythe of Commonwealth Bank of Australia.

"It suggests the direction of the next rate move is going to be up, even if there is some uncertainty about when the Reserve Bank might pull the trigger," he added.

Inflation debate

The bigger-than-forecast rise in consumer prices has already triggered a debate in the country on the impact of rising price on the economy.

While the Reserve Bank of Australia (RBA) has maintained that keeping prices in check is one of its top priorities, it has left interest rates unchanged since November 2010.

Earlier this month, Glenn Stevens, the governor of RBA said "as the temporary price shocks dissipate, CPI inflation is expected to be close to target over the next 12 months,"

However, analysts said the latest figures indicate that the central bank may have to change its stand going forward.

"It's a high number... and back to back high core inflation numbers are not a great outcome for the RBA," said Ben Jarman of JP Morgan.

"It should make the RBA nervous and their own forecasts are bound to go higher," he added.

Adam Carr of brokerage firm ICAP added that consumer prices will continue to rise further.

"This is the exact reason I have been arguing that the RBA should hike rates because these surprises were always the risk," he said.

Dollar vs dollar

While the RBA has maintained that it expects inflation rates to be steady once the country has fully recovered from the devastation caused by the natural disasters, analysts said markets were speculating that the central bank may raise rates sooner than expected.

Image caption The Australian currency hit an all-time high against the US dollar

"Up until this morning the markets were pricing in a rate cut, but the latest numbers have changed all of that," said Michael McCarthy of CMC Markets.

Mr McCarthy explained that if the RBA increases the interest rates further, it makes the Australian currency an attractive option for investors.

"The consensus is that rates will rise and that has fed through to the Aussie dollar," he said.

The Australian currency was trading as high as A$1.10 against the US Dollar in Asia trade, the highest level since it was freely floated in 1983.

However, analysts said that the rise of Australian currency should not be attributed to domestic economic data alone.

"You also have to take into account the weakness of the US Dollar," said Mr McCarthy.

He explained that the stalemate in the ongoing debt ceiling talks in the US, coupled with a slowdown in its economic recovery, had seen the US dollar lose ground against major global currencies.

He said that while the Australian currency has been gaining mostly due to economic developments at home, the weakness of US dollar was also fuelling its rise.

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