Australia | Jul 24 2006
By Greg Peel
We all knew it was coming, but the numbers had to be there to prove it.
The Producer Price Index (PPI) measures the cost of production of goods, and most immediately reflects commodity price increases, as opposed to the Consumer Price Index (CPI) which measures retail prices to the customer.
While the CPI might seem more relevant to the average citizen, The Reserve Bank of Australia tends to focus more closely on the PPI to provide an indication of where inflation is heading. Governor Macfarlane made specific mention of the PPI when he last hiked rates in March.
The June quarter PPI rose 1.6% – the biggest quarterly rise in six years. This follows rises of 0.7% in the March quarter and 0.8% in December. The figure was 4.5% above the level of last year.
The upshot is that higher fuel prices are beginning to be passed through. They rose 12.3% in the quarter. The Commonwealth Bank calculates that the PPI increase ex-energy was 0.9% and includes affects from building construction and agriculture (including even the humble banana).
The RBA breaks down its PPI measure into three stages – final, intermediate and preliminary. The final figure is the quote of 1.6%, but greater increases were felt in the intermediate (2.8%) and preliminary (3.1%) stages of production, which implies that there is still some holding back of price increases at the expense of margins.
Manufacturing is a telling area, says CommBank, where input prices have risen 18% pa while outputs are only up 9.9% pa.
ANZ notes there is not a direct relationship between the PPI and CPI, but these numbers suggest the CPI number is not going to suddenly be on the low side. Most economists are tipping a quarterly increase of 1.2%. That number is out on Wednesday.
This all adds up to an August rate hike as being pretty much a certainty.