Australia's ongoing drought combined with rising world oil prices have continued to keep inflation high in the country, with food and petrol prices worst hit.

Inflation figures for the final three months of 2002 were at the top end of targets, as the cost of coping with the country's worst drought in over a century was passed on to consumers.

For the three months from October to December, overall inflation was 3%.

This outcome is consistent with the government's forecast that inflation will fall to 2.5% over 2002-03 Australian Treasury

The Reserve Bank of Australia has a target of keeping inflation between 2-3%, but economists predicted it would fall to within these levels by the end of the year.

Improving trend

The lastest inflation figures are already down from the previous three month period, from July to September when inflation stood at 3.2%.

The government said the figures proved inflation was being well-contained, despite the rising fuel and food prices.

"This outcome is consistent with the government's forecast that inflation will fall to 2.5% over 2002-03 and remains within the medium-term inflation target," said a statement from the Treasurer Peter Costello.

Economists seem to agree, predicting further improvements ahead.

"As the stronger Australian dollar continues to filter through into lower import prices, there's now a very good chance we'll see inflation closer to two percent than three percent by the end of the year," said Brian Redican, chief economist at Macquarie Bank.

Costly drought

Earlier on Wednesday, the Australian Bureau of Statistics reported 0.7% rise in its Consumer Price Index (CPI) for the final three months of the year.

You still have the effects of the drought coming through in terms of impacts on food prices and we are starting to get the impact of higher oil prices Kieran Davies, ABN Amro

This was in line with forecasts, taking the year-on-year figure to 3%, still one of the highest in the industrialised world.

The country is continuing to struggle against one of the worst droughts in the last 100 years, that has ruined vast fields of crops and damaged exports.

Data earlier this week also suggested Australia's housing boom is slowing and car sales slipping after a record performance in 2002.

As expected

Nonetheless, analysts remained unperturbed by the recent figures.

"It is in line with expectations," said Kieran Davies, chief economist at ABN Amro.

"You still have the effects of the drought coming through in terms of impacts on food prices and we are starting to get the impact of higher oil prices," added Mr Davies.

Food prices rose by 1.4% in the final three months of 2002, while transport costs were up 1.1%, reflecting the effected of higher world oil prices on petrol prices.

Glenn Maguire, chief economist at SG Australia said the fact that inflation was returning to the 2-3% target band was encouraging.

"Most of the increases were skewed to one-off effects such as higher oil prices and higher fresh food prices as a result of the drought.

"I think once they wash through you will see downward pressure on tradeable goods prices and I'll be looking for inflation to drop to the bottom of the target by the end of the year."