Australia | Jan 21 2008
By Greg Peel
The December quarter producer price index came out at 0.6% when the consensus forecast sat at 1.1%. In a game where every little percentage point means make or break as far as monetary policy decisions are concerned this is a big, big difference. However, as to how much the consumer price index might reflect a similar fall, or how much the PPI will effect the Reserve Bank’s rate decision next month, is the case in point.
On first glance, this result might appear enough to provide economists with seeds of doubt regarding an interest rate rise in February, which to date has been considered almost a given. The September quarter PPI was 1.1%, so apart from being below expectation the December figure does represent quite a drop. However, a fall in the PPI does not necessarily dictate that the CPI figure will be similarly affected. One need first look at the breakdown.
Firstly, domestic prices rose by 0.9%, offset by a fall of 1.4% in import prices. Looking at the domestic side, an increase of 12.3% in petroleum pricing was no great surprise. More surprising was the increase in building construction (1.4%) and the big fall in fruit (-19.4%). Supermarket shoppers in particular will probably be surprised by the big fruit price fall, which one presumes reflects a bit of rainfall lately, but ANZ economists suggest the CPI will prove what supermarket shoppers already suspect – that price falls at the producer level have not been manifestly passed on.
One reason for this is given the seasonality and volatility of fruit prices, retailers smooth price changes. The other thing to consider is that food is not considered in the more important core CPI measure, given exactly that volatility.
The increase in construction costs surprised the ANZ economists as they were looking for a lower figure. Construction costs are rather more important for the core CPI – one reason why ANZ is not reading too much into the low overall PPI. Indeed, despite the fall the annual PPI figure has still increased from 2.4% to 2.8%. ANZ is forecasting a 0.8% increase in the December CPI (due out Wednesday) and a 2.8% increase annually. The economists’ core CPI forecast for the quarter is unchanged at 0.9%.
At the end of the day, there is not enough correlation between PPI and the RBA’s preferred measures of core inflation to suggest to ANZ that the RBA will do anything but raise the interest rate next month. There are other factors to consider, being the interim mortgage rate rises from the big banks and the possibility of a US recession affecting global growth, which might encourage the RBA to think twice. However, RBA governor Glenn Stevens said on Friday that he’s more worried about inflation than economic growth.
Ergo, a rate rise in Australia is still on the cards.