Australia | Jul 21 2008
By Greg Peel
The March quarter saw an enormous jump in the Australian producer price index following the oil price surge over the period. Economists were expecting the PPI to ease to 1.6% growth in the June quarter – which is still a hefty move – down from 1.9% growth in March. However, today’s release showed only a 1.0% rise.
This took the annual rate of CPI growth to 4.7% in June which looks a lot less ominous than the predicted 5.3%.
While petrol refining added a significant 8.2% to the June quarter figure, and meat (3.1%) and non-building construction (2.0%) added their bit, a 7.3% fall in agriculture provided the dampener along with a 6.4% fall in electronic manufacturing. If you split the number into domestic prices and imported prices, we find domestic up 1.4% for the quarter against the March quarter rise of 2.0% while imported fell 1.0% against a 0.6% rise in March.
All hail the Aussie dollar. At least its recent strength is beneficial to one side of the market.
As to what can thus be construed for Wednesday’s more important consumer price index number, well it’s not a given. The PPI and CPI have moved in relative concert recently, which should bode well for some relief on the CPI front as well. The agriculture number could, for example, herald a decent fall in fruit and vegetable prices to offset petrol problems. However there doesn’t have to be a big correlation between the two, particularly if retailers capitulated over the June quarter and passed on increased costs to consumers which they had held back in previous quarters.
The ABS also breaks down the PPI into three “stages of production”. The preliminary stage saw prices increase by 3.5% and the intermediate by 2.7% before the final stage ended with the 1.0% rise. ANZ economists point out that the big rise in preliminary should mean the potential for the other stages to be influenced at the next quarter’s result. ANZ also makes the point that while falling import prices provided relief in June, the domestic price increase of 1.4% takes the annual rate to 6.0% which is still very high.
Nevertheless, if the CPI can match the PPI then once again the chances of the RBA hiking the cash rate in August have diminished. ANZ has been among those retaining a hawkish stance, believing another rate rise (maybe even two) to be possible this year despite a more dovish tone from the RBA lately. The economists admit this PPI result suggests they may have to reconsider, but will wait for the CPI result to change their minds.
One also has to remember that the RBA is worried about three inflationary elements – the CPI, the terms of trade and wage claims. Australia’s manufacturing index pales into insignificance compared to its commodity export business, and thus the PPI’s influence is only minor when stacked against the terms of trade. And wage claims, as we know, are currently gaining momentum.