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Australia inflation bogeyman still fast asleep in second quarter

By Wayne Cole

By Wayne Cole

SYDNEY (Reuters) - Australia's core inflation rate is expected to have stayed below target for a sixth straight quarter through April-June, a reminder of just why interest rates in the country are at record lows and set to remain there for months to come.

Analysts polled by Reuters forecast consumer prices (CPI) rose around 0.4 percent in the second quarter, from the first, which would nudge the annual pace up a tick to 2.2 percent.

The Australian Bureau of Statistics releases the report for the three months to June on July 26.

Housing and health likely saw costs rise, while petrol and car prices fell in the quarter. The biggest single increase was caused by damage done to fruit and vegetable crops by Cyclone Debbie, which analysts at ANZ estimate would add 0.2 percentage points to CPI in the quarter.

They also note, however, that the government statistician (ABS) is making greater use of scanner data at supermarkets to measure the volume of goods sold and not just the price. If consumers substituted cheaper goods for those that jumped in price, it could limit the upward impact on the CPI.

To strip out such one-off influences, the Reserve Bank of Australia (RBA) looks at various measures of underlying prices.

Analysts estimate underlying inflation rose around 0.5 percent in the quarter, which would keep the annual pace stuck around 1.75 percent.

Such an outcome would mean underlying inflation had been under the RBA's 2-3 percent target band since early 2016, and has not been above the band in seven years.

"We expect the Q2 CPI to confirm that inflationary pressures have stabilized, although we continue to see only a very gradual lift from here," said ANZ senior economist Jo Masters.

"Indeed, on our forecasts, core inflation is set to remain below 2 percent until late 2018."

Steep increases in electricity and gas prices are expected to add to CPI this quarter, yet those will also act as a tax on household incomes and spending power.

Plenty of headwinds to inflation remain including record-low wage growth and the recent climb in the Australian dollar.

The RBA itself doubts inflation will get back to 2 percent for another year or more, but has ruled out cutting interest rates again for fear of stoking a debt-driven bubble in the Sydney and Melbourne housing markets.

Neither are policy makers in any rush to start lifting the 1.5 percent cash rate. Speaking last week, RBA Deputy Governor Guy Debelle argued there was no automatic reason for Australia to follow some of its peers in tightening.

The global forces keeping rates low would "continue to do so for the foreseeable future," said Debelle, quashing market talk of a hike before year-end.

(Reporting by Wayne Cole; Editing by Shri Navaratnam)