Australia inflation runs hot in July, adding to rate hike risk

Sydney, Aug 26 (Reuters) - Australian consumer prices surged past expectations in July, driven by surging fuel and travel costs, data revealed on Wednesday, heightening the likelihood of another interest rate increase. The Australian dollar climbed 0.2% to $0.7176, while three-year government bond futures fell after initially rising to 95.42.

Market participants increased the probability of a fourth rate hike by the Reserve Bank of Australia (RBA) next month to 36% from 17%, with a potential move by February next year now priced at 94%. After the strong figures, Deutsche Bank now anticipates a quarter-point rate increase from the RBA in September, citing fresh inflation risks.

According to Phil Odonaghoe, an economist at Deutsche Bank, the July Consumer Price Index (CPI) leaves little room for the RBA to take a different stance, and the sooner it does, the better. The Australian Bureau of Statistics reported that the monthly consumer price index (CPI) increased by 1.0% in July from June, surpassing expectations of a 0.8% rise.

Fuel prices jumped 7.5%, after falling for three months, while the annual pace of inflation slowed to 3.5% from 3.8%. The trimmed mean measure of core inflation rose by 0.5% in July, the biggest increase in a year, well above forecasts of 0.3%, pushing the annual rate to 3.6%. The RBA kept interest rates unchanged at 4.35% for the second consecutive meeting after three consecutive hikes this year to combat inflation.

Minutes from the central bank, released on Tuesday, indicated several board members believed it was quite possible that upside inflation risks would materialize, potentially necessitating further tightening. The bank had forecast trimmed mean inflation to decelerate to 3.3% by year-end. July's report showed new dwelling prices jumped 5.7% in July from a year ago, cooling slightly from a 5.8% increase the previous month, as builders passed on higher material and labor costs, according to the ABS.

Rent inflation remained elevated at 3.6%. Tradeable goods prices surged 1.5% due to fuel cost increases, up from a drop of 0.8% the previous month. There is a significant risk that inflation remains too high and fails to align with the RBA's optimistic forecasts, said Harry Murphy Cruise, head of economic research for Oxford Economics Australia.