Australian Bureau of Statistics data showed inflation rose 1.3 percent in the three months to March, exceeding the market's quarterly expectations of 1.1 percent and taking the annual inflation rate to 3.4 percent.

With the central Reserve Bank of Australia aiming to keep inflation under 3.0 percent, Prime Minister John Howard conceded the figures showed the economy was not performing as strongly as 12 months ago.

But he said he was confident inflation would soon be back under control as the impact of one-off items like the drought and oil priced decreased.

"It is plainly due to the increase in oil prices preceding the commencement of the war in Iraq, and also the drought-induced increase in food prices," he told reporters.

"I don't believe that there's anything other than a one-off series of factors at work."

Economists said if volatile items such as fuel and drought-affected food were taken out, the underlying inflation rate remained subdued at 2.7 percent.

"Looking through the haze, today's result will not concern the Reserve Bank," BT Funds Management chief economist Chris Caton said. "Accordingly, our call of no change in official interest rates remains in place."

Caton said the factors contributing most to the overall increase in the March quarter were an 8.6 percent rise in the cost of automotive fuel, an 11.7 percent increase in vegetable prices and an 11.8 percent rise for pharmaceuticals.

But he said together they accounted for less than seven percent of the inflation index and were expected to have only a short-term impact.

"The fuel price increase has already been reversed, and the price of veggies

is a clear drought effect," he said.

The rises were partially offset by falls in the cost of furniture (down 2.4 percent), audio visual and computing equipment (down 4.4 percent), women's clothing (down 2.0 percent) and overseas travel (down 1.2 percent).

Acting Treasurer Nick Minchin said wages growth remained steady, productivity was growing solidly and most measures of input price inflation had been low from recent quarters.

"These conditions are consistent with the government's forecasts that inflation will fall to within the medium-term inflation target in coming quarters," he said.

"Today's data confirms that the Australian economy continues to enjoy a healthy combination of solid growth and moderate inflation, despite a difficult global environment."

Westpac Bank senior economist Justin Smirk said while the figures were encouraging, the Australian economy was still likely to slow in the months ahead.

He said the Westpac/Melbourne Institute Leading Index of Economic Activity -- which predicts economic growth six to 12 months in the future -- had a reading of 0.0 percent in February, well below its long term trend of 2.8 percent.

"The February index is a timely reminder that the Australian economy is not yet out of the woods," Smirk said, predicting a slowdown in the first half of 2003 followed by a modest upturn.

SPACE.WIRE