Inflation expectations stay at new peak

Concerns about a slowing economy are failing to ease record-high consumer expectations for inflation - and petrol prices are getting the blame.

Hopes for an interest rate cut were dashed as tightening labour market conditions convinced economists that wages pressures could still spark another rate rise.

Median inflationary expectations held at 5.9 per cent in July, the same level as the previous month when the reading reached its highest point in the Melbourne Institute (MI) survey's 15-year history.

In the same period, consumer sentiment levels dived to their lowest point since Australia emerged from its last recession.

MI research fellow Sam Tsiaplias said higher fuel prices were pushing up inflation expectations even as the economy slowed.

"This time we have a special set of circumstances," Dr Tsiaplias said.

"When you have high fuel prices, it takes away from consumers' ability to spend on other things and consequently we get a slowdown."

The proportion of people expecting inflation to stay within the Reserve Bank of Australia's (RBA) two to three per cent target band fell in July for the seventh successive month to an eight-year low of 7.5 per cent.

This was the lowest level since June 2000, the month before the former Howard government introduced the goods and services tax.

Petrol prices in Sydney reached $1.74 a litre as reports of Iranian missile tests stirred worries that crude oil prices would rise even higher than last week's record $US146 a barrel.

ANZ co-head of Australian economics Sally Auld said rising petrol, rent and food prices were pushing up inflation expectations.

"And if we needed a refresher on inflation risks, today's consumer inflation expectations are a stark reminder," she said.

The latest inflation report, based on a poll of 1,200 people, comes a day after the Westpac-Melbourne Institute consumer sentiment index for July was revealed to have fallen to its lowest level since January 1992, when Australia was emerging from recession.

But expectations that interest rates may stop rising were jeopardised today as labour force data for June showed almost 30,000 jobs were created.

The jobless rate for last month also fell to 4.2 per cent, Australian Bureau of Statistics data showed, stirring concerns about wage pressures.

With inflation already running above four per cent, the RBA is hoping that consumer price index data for the June quarter shows some moderation when the numbers are released on July 23.

"Today's firm employment report underlines how premature it is to be talking about rate cuts but it doesn't build the case for an increase," ICAP senior economist Matthew Johnson said.