Unlike New Zealand where another 0.25 per cent rise in official interest rates is being tipped this Thursday, Australia may still avoid a rate rise.
It all hinges on the key price measures out this week: the Producer Price Index to be released later today and the Consumer Price Index on Wednesday, to be followed by the Reserve Bank’s reworking of the CPI to producer a price index closer to what it looks for.
The PPI for September was up one per cent: economists want to see a substantial drop on that to less than half a per cent.
But they fear the lower oil prices in the quarter will mask the continuing ‘stickiness’ of price pressures for business. Price movements in the primary and intermediate areas of the index will be closely watched to see if there are signs of inflation abating.
Then Wednesday’s CPI: the figure in the September quarter headline rate was 0.9 per cent for an annual rate of 3.9 per cent. That wasn’t much changed from the 4.1 per cent in the June quarter and a quarterly rate of more than one per cent.
According to the RBA measured (the ‘weighted mean’ and ‘trimmed mean’) inflation rate is still just under or just over the three per cent level, which is at the top end of the range and too high for its liking.
New Zealand last week saw a sharp drop as petrol and energy prices generally dived. Inflation across the Tasman was actually negative on a headline basis but was still present when the distortions of the oil price fall were stripped out.
Excluding fuel, consumer prices rose 0.6 per cent in the December quarter, Statistics NZ said last week. This was after the headline rate fell 0.2 per cent in the three months to the end of December.
That cut New Zealand’s annual rate to 2.6 per cent from 3.5 per cent in the third quarter, putting inflation back in the central bank’s one-to-three per cent target range for the first time in a year and a half.
But the Reserve Bank is likely to raise rates this week because it sees the Kiwi economy and price pressures turning up at the end of 2007 as the impact of the drop in oil prices dissipates.
The RBA board meets on February 6 with the decision a day later at 9.30 am. It will have also seen how the US Federal Reserve has gone at its meeting a week earlier.
Banana prices here will have been a big influence on the CPI, along with the fall in petrol prices: that will knock the headline rate down to as low as 0.2 per cent and the annual rate to around 3.5per cent according to some economists.
That will still be too high.
The RBA will have already seen the solid retail sales figures for November, the strong employment numbers for December and solid sales figures from a growing range of retailers for December (David Jones, Harvey Norman, Noni-B, Rebel Sport, JB Hi-Fiand Country Road).
Australian petrol prices are estimated to have fallen around 12 per cent in the quarter, while banana prices dropped about 50 per cent. If current trends continue petrol prices will be sharply lower again this quarter while banana prices will be lower.
But investors should watch meat prices. In last Friday’s Air Weekly we told you of the growing belief that the drought will break with the El Nino easing over the next three months.
Well, as we saw late last week and over the weekend drought breaking rains have fallen over much of South Australia, Central Australia, Western NSW and Western and Central Victoria.
Cattle and sheep farmers in these areas will now be looking and wondering if they should start re-stocking by withholding animals from the market. If that becomes a trend, watch the prices of beef and lamb explode in the next month or so.
And watch the moans and groans about the pricing tactics of Woolies and Coles. They are already under pressure for being slow to pass on lower petrol prices.