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Australian inflation came in below forecast in the January-March quarter, data showed Wednesday, underscoring softness in the economy and spurring talk of an interest rate cut.
The consumer price index (CPI) rose 0.4 percent quarter on quarter and 2.5 percent year on year, the Australian Bureau of Statistics said. Analysts had predicted 0.7 percent and 2.8 percent.
While the figures are up from the 0.5 percent and 2.2 percent in the previous three months, it is the second straight quarter that inflation has come short of expectations.
The Australian dollar dropped from US$1.0275 to $1.0238 on the data as investors saw them stoking chances of a central bank interest rate cut from the 3.0 percent it has been at since December.
Data Wednesday showed price rises for new home purchases, pharmaceutical products, tertiary education and tobacco offset falls in the cost of international holiday travel, furniture and seasonal fruit.
Australia dodged recession during the global downturn due to its strong links to China, but its Asia-driven mining boom is nearing its peak and the economy is facing a difficult transition away from the key resources sector.
The economy grew 0.6 percent in the December quarter, notching 21 continuous calendar years of expansion, but strength in the mining industry is masking softness in the broader economy and Canberra has retreated from vows of a budget surplus.
Treasurer Wayne Swan is facing the tough task of shaping an election year budget that will be popular with voters despite sharply falling revenues.
"The high dollar has put a huge squeeze on many businesses, both large and small, across our economy," Swan told reporters.
"That combined with the impact of lower commodity prices at the end of last year in particular has mean that profitability for many businesses is down substantially," he added.
"We're going to have to make some difficult and tough decisions in this year's budget."
The ruling centre-left Labor party is on track to lose the September 14 election, according to opinion polls.
Analysts said the latest inflation data, well within the Reserve Bank of Australia's target band of 2.0-3.0 percent, was likely to trigger a further rate cut to stimulate the economy as early as next month.
"Quite clearly the strong Australian dollar is still playing a role in holding inflation down, but the weakness in prices for things like furniture and household appliances also tells us that underlying demand in the economy remains weak and that companies lack pricing power," said AMP Capital chief economist Shane Oliver.
"While past interest rate cuts are getting some traction the economy remains vulnerable and in need of more support ahead of the slowdown in mining investment that will occur this year."