The Economy: Producer Prices No Concern

By Glenn Dyer | More Articles by Glenn Dyer

The growth in producer prices slowed in the December quarter, a development some economists reckon gives the Reserve bank room to cut interest rates a fortnight today.

But that not might happen with the Reserve Bank more worried about developments in Europe, especially Greece, where talks on a final debt cutting deal seem to have stalled.

The Producer Price Index (PPI) at the final stage of production rose 0.3% in the December quarter, for an annual rise of 2.9%, according to figures released by the Australian Bureau of Statistics yesterday.

That compared with a 0.6% rise in the September quarter and means the annual rate was a touch under the 3% forecast by the market.

The PPI at the intermediate stage rose 0.3% in the 4th quarter of last year, while at the preliminary stage it rose 0.4%.

Over the year to December, at the intermediate stage the PPI rose 4.9% and at the preliminary stage it was up 5.9%.

The ABS said the increase in the final stage PPI in the December quarter was "mainly due to rises in the prices received for industrial machinery and equipment manufacturing (+3.2%), other manufacturing (+3.1%) and motor vehicle and part manufacturing (+1.4%)".

It said the rise was "partly offset by falls in the prices received for other agriculture (down 21.8%) and flour mill and cereal food manufacturing (–6.1%)".

Sharp increases were reported at the earlier stages in the cost of fuel (oil) and oil refining and were partly offset by falls in the prices received for grain, sheep, beef and dairy cattle farming (–4.6%) and basic non–ferrous metal manufacturing (–10.4%).

National Australia Bank chief economist Alan Oster said the PPI figures were lower than he expected.

‘‘This is consistent with the fact that you’ve got a higher currency that’s lowering imported inflation,’’ Mr Oster said.

He said the data suggested tomorrow’s CPI figures may also be lower than market forecasts.

In a separate forecast, the NAB economics team said the bank was looking at a CPI reading (on the underlying basis used by the Reserve Bank) of 0.5% for the quarter and 2.4% annual for 2011. 

"A weak underlying CPI result (below 0.7%), coming on the heels of declining asset prices, soft credit demand and an apparent rise in discouraged workers, would likely complete the case for a rate cut.

"There is likely to be a stronger case for more accommodative monetary policy following the CPI release.

"The economy is clearly struggling to adjust to the pressures of the mining boom, becoming increasingly distorted by the strength of the AUD and the outlook for minerals and infrastructure investment.

"Beyond February, the RBA may face the issue of whether the lagged impacts of three successive rate cuts will coincide with a mining sector induced re-kindling of the domestic economy in late 2012.

"Headline CPI inflation may be even weaker than the underlying rate in the December quarter because of declining fruit and vegetable prices. This is less relevant to the RBA deliberations but it will mean some easing of cost of living pressures," the bank said yesterday.

Westpac said at the weekend that it expects underlying inflation to rise to 0.6%, up from 0.3% in the September quarter, for an annual rate of 2.5%.

"Overall, we do not expect an inflation print which is likely to substantially move the policy debate," Westpac economists wrote.

About Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

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