Australia | Apr 20 2009
By Greg Peel
Economists were expecting the March quarter producer price index (PPI) – a measure of inflation at the wholesale level – to rise by 0.6% over the December quarter. As it was, the result was a fall of 0.4%. A weaker than expected PPI is consistent with a similar result last week for the US monthly PPI.
The result is measured at the “final stage”. The ABS splits production into three stages – preliminary, intermediate and final. There were much bigger falls – 3.2% and 4.6% respectively, in the intermediate and preliminary stages. The drop in the final stage came even as imported goods prices rose 3.9% in the quarter as the effects of a lower Aussie filter through. Import prices are now up over 20% for the past twelve months while domestic PPI inflation was down 1.0% for the quarter and up only 1.8% for the year. Year-on-year the domestic PPI was up 6.8% in the December quarter.
Is Australia facing deflation?
ANZ economist Riki Polygenis thinks not. The fall in the March final PPI was largely driven by petrol (down 8.9%) along with dairy products (down 4.9%) and building construction (down 1.6%) which outweighed typically seasonal inflationary influences. Commodity prices have fallen a long way but the offset of a lower Aussie is just starting to filter through. And while Australia will experience a recession, demand will not fall as sharply as elsewhere on the globe from either the consumer or idle production capacity.
Rather, the PPI result is “encouraging” as it means inflation is falling as expected. Economists will use the PPI result as a potential reason to tweak down their consumer price (CPI) expectations (due Wednesday). Westpac economists expect the CPI to continue to weaken in 2009, allowing room for further rate cuts from the RBA.