Australia Producer Inflation Tempered by Imports

Australia's producer prices rose by less than expected last quarter thanks to falling costs for a range of imported goods, perhaps lessening the risk of an alarmingly high reading for consumer inflation later this week.

Austrailia, Austrailian Flag
Austrailia, Austrailian Flag

Monday's figures from the government showed prices at the final stage of production (PPI) increased by 1.0 percent in the first quarter, well short of the 1.6 percent rise expected. Growth for the year slowed a tick to 4.7 percent.

The Australian dollar dipped as investors assumed the data would ease pressure for a further rise in interest rates from the Reserve Bank of Australia (RBA), and might even hasten the day when it might cut.

"It does look as if, at least, we should have inflation peaking," said Stephen Roberts, a research director at Lehman Brothers. "The number confirms the RBA is on hold and if we get a good underlying inflation report coming through then conceivably, by the end of 2008, we could
be looking at a rate cut," he added.

The consumer price report for the second quarter is due on Wednesday.

Analysts have been looking for a hefty rise of 1.1 percent in core inflation, lifting the annual pace to a fresh 17-year high of 4.3 percent and well above the central bank's 2 to 3 percent target zone.

Yet the RBA had already flagged that inflation would increase more than 1.0 percent in the quarter and argued that a sharp slowdown underway in domestic demand would see price pressures ebb over time.

"This suggests to us that the bank is prepared to look through strong inflation in the near-term, given the clear weakening in demand indicators and the commensurate effect on expected inflation over the medium term," said Tony Meer, chief economist at Deutsche Bank.

Made In Australia

The restrained reading for producer prices owed much to the strength of the Australian dollar, which rose around 7 percent over the quarter in trade-weighted terms.

That helped pull down prices for a raft of imported final goods ranging from consumer electronics to office machinery and cars. In all, the cost of imported final goods fell 1.0 percent in the quarter to be down 3.2 percent on a year earlier.

In contrast, the price of domestically produced goods climbed by 1.4 percent in the quarter and 6 percent for the year, with construction costs particularly high.

There were also significant price increases for goods at the early stages of production, notably oil, chemicals, iron and steel.

"There are broad-based costs pressures early in the production process, which will keep the RBA anxious," said Brian Redican, a senior economist at Macquarie. "But it seems like costs are not being passed down the chain of production as much as we thought," he added. "Maybe customers are pushing back and squeezing profit margins."

The central bank has lifted rates four times in the past year, taking the cash rate to a 12-year peak of 7.25 percent, as it grappled with widening price pressures in a booming economy.

Recently, however, the economy has shown clear signs of cooling, leading the RBA to hope that rates are now high enough to ensure inflation returns to its target in time.