Australian inflation surges, sparks rate fear

By Wayne Cole

SYDNEY (Reuters) - Australia's core inflation rate surged to its fastest pace in almost 17 years last quarter as the cost of eating, driving and renting all rose, sparking concerns interest rates may have to go yet higher to curb prices.

The Australian dollar jumped to a 24-year high above 95 U.S. cents after Wednesday's data showed annual core inflation ran at around 4.25 percent on average in the first quarter, up sharply from 3.6 percent the previous quarter.

That outstripped forecasts of 3.9 percent and took inflation further above the Reserve Bank of Australia's (RBA) 2 percent to 3 percent comfort zone.

"Underlying inflation above 4 percent is a significant way above the target, and the slowdown in demand needed to get back into target is going to have to be quite significant," said Stephen Halmarick, co-head of market economics at Citi.

"That would imply the risks to monetary policy are to the upside despite some clear evidence of some slowdown in the economy."

Investors had been braced for a high result given producer prices jumped a record 1.9 percent in the first quarter while inflationary pressures were evident across the globe as oil and grain prices reached record highs.

Still, the central bank had largely pre-empted this latest spike by raising interest rates in both February and March, taking them to a 12-year high of 7.25 percent.

That had the desired effect on domestic demand. Consumer sentiment has slumped, leading retail sales to fall for two straight months, while credit growth slowed and businesses reported a sudden downturn in activity.