Australia inflation undershoots forecasts, markets pare RBA hike bets

By Stella Qiu

SYDNEY, July 29 (Reuters) - Australian ‌consumer prices rose at ​a slower ​pace in the June quarter as fuel costs eased from peaks, while core inflation undershot forecasts and lessened pressure for a further hike in interest rates.

The Australian dollar fell 0.3% to $0.6953 ‌and 3-year government bond yields declined 10 basis points to 4.482%. Markets pared back the ⁠chance of an interest rate increase next month to just 4%, from 21% previously, while a hike this year is priced at 50%.

Data ‌from the Australian Bureau of Statistics ‌out on Wednesday showed its consumer price index (CPI) rose 0.6% in the second quarter from the previous period, after jumping 1.4% in the first quarter. Annual CPI eased to 4.0% from 4.1%.

The key trimmed mean measure ​of core inflation increased by 0.8% on-quarter, just below forecasts for a 0.9% gain. The annual pace picked up to 3.6%, from 3.5%, but was below market forecasts for 3.7% and the Reserve Bank of Australia's ⁠own forecast of 3.8%.

"All that backs up our view that the RBA will keep rates on hold next month," said Harry Murphy Cruise, head of ​economic research for Oxford Economics Australia.

"Underlying inflation is not just resisting pressure to rise; in quarterly terms, it is continuing to ease."

For June alone, CPI fell 0.1% from ​the previous month as fuel costs plunged nearly 11%, pulling the ‌annual pace down to 3.8%, though the data has already been overshadowed by a 20% surge in oil prices this month as the U.S. and Iran resumed attacks in ⁠the Gulf.

HOUSING STILL A SOURCE OF INFLATION

The Reserve Bank of Australia has raised the key rate three times this year to 4.35% to tame inflation, fully reversing the amount of policy easing implemented last year. Governor Michele Bullock said on Tuesday it ⁠was not clear if rate hikes so far were enough to return inflation to target.

The labour market also stayed surprisingly resilient, with ​the economy churning out more jobs in June despite a small pick-up in the unemployment rate.

Wednesday's report showed higher commodity prices are still flowing through the economy, with new dwelling prices jumping 5.8% in June from a year ago — the fastest pace ‌in almost three years — as builders passed on higher material and labour costs.

Rent inflation held steady at an elevated rate of 3.6% in June. Most of the disinflation came ‌from goods, while services inflation accelerated to 4% in June, from 3.7% the previous month.

"We have broad, domestically driven pressures, ⁠not temporary price movements the RBA can easily ‌look through," said Russel Chesler, VanEck's ​head of investments and capital markets. "Housing remains the biggest pressure point."

"The risk is that the next inflation prints move higher again," he said.

(Reporting by Stella Qiu; Editing by Jacqueline Wong and ‌Kevin Buckland)

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