Australian producer prices rose faster than expected last quarter, led by higher food and construction costs, fueling concerns consumer inflation could accelerate enough to provoke another hike in interest rates.
Monday's figures showed the price of finished products (PPI) increased by 1.1 percent in the third quarter, topping forecasts of a rise of 0.8 percent and the biggest gain since mid-2006. Growth for the year picked up to 2.4 percent, compared with a forecast of 2.1 percent.
"It is always a bit hard to find any correlation from these numbers to the consumer price index, but they do give a broad parameter in the sense that domestic price pressure is high," said Michael Blythe, chief economist at Commonwealth Bank. "It certainly doesn't ease concerns about rising inflation and rising interest rates."
The Reserve Bank of Australia (RBA) lifted interest rates to a decade high of 6.5 percent in August to head off an unexpected pick up in inflation. But the economy continues to run hot with unemployment falling to 33-year lows and consumption and borrowing strong.
Now analysts are worried that a high reading for third-quarter consumer price (CPI) data, due on Wednesday, could lead the central bank to tighten again as early as November.
"It reinforces our expectation of a strong CPI," said Anthony Thompson, a senior economist at Westpac. "At this stage the view is that the CPI will be strong enough to prompt them (Reserve Bank) into a November hike."
A Reuters poll of 25 analysts taken last week produced a median forecast of a 0.9 percent increase in the CPI last quarter, a little below the previous quarter's alarming 1.2 percent jump.
Underlying inflation, which is what policymakers focus on, is seen rising 0.8 percent, just a shade slower than the second quarter's surprisingly large 0.9 percent increase.
"The figures show that underlying inflationary pressures are building and another rate hike could well be needed," said Brian Redican, a senior economist at Macquarie Bank. "It will add to nerves for the CPI."
He noted producer price inflation would have expanded even more if it were not for the influence of a strong Australian dollar and a flood of cheap manufacturing goods out of China and India keeping the cost of imports down.
Import prices actually fell 1.5 percent in the third quarter, to be 5.5 percent lower than in the same quarter last year, led by falling prices for consumer electronics.
In contrast, domestic prices climbed 1.5 percent in the third quarter, to be up 3.7 percent on the year. Rising costs were again evident in the booming construction sector while the lingering drought pushed up agricultural and energy prices.
There was also a sharp increase in real estate costs, which could point to rising house prices.
"The Aussie dollar is helping out here, but at the end of the day it gets swamped by underlying price pressures that really reflect the very strong domestic economy and the capacity constraints in the system," said Su-Lin Ong, a senior economist at RBC Capital Markets.
"The fact that PPI has been elevated for a little while does sit with a view that there is a risk that inflation prints high again on Wednesday morning," she added.