Australia | Jan 25 2010
By Rudi Filapek-Vandyck
Australia’s December quarter final stage producer price index (PPI) fell 0.4% (quarter-on-quarter), well below consensus which assumed a small increase of 0.1%. The unexpected outcome has cut the annual headline PPI rate to a negative 1.5% (year-on-year), a record all-time low for this series which commenced in the third quarter of 1998.
Westpac economists, who were as surprised as anyone else by the low PPI read, comment the Q4 PPI printed below their forecast due to a weaker than expected core PPI (minus 0.4% q-o-q versus an expected minus 0.1%), reinforced by a steeper than expected fall in PPI petroleum refining (minus 6.8% q-o-q whereas petroleum in MPI had implied minus 0.4%).
Within the weak core PPI, core domestic prices rebounded less than expected (up 0.4% q-o-q) and core import prices fell more than expected (minus 5.5% q-o-q). The stronger Aussie dollar was a big contributor to the latter.
However, report the economists, while the PPI read was well below expectations, the detail on house construction output prices necessitates only a minor downward revision to Westpac’s Q4 CPI forecasts (release scheduled for Wednesday).
Westpac’s headline CPI forecast has now edged lower but still rounds to the economists’ preliminary forecast of up 0.4% q-o-q and up 2.0% y-o-y. Westpac’s forecast for the average RBA underlying CPI has been revised down to up 0.6% q-o-q (was up 0.7%).
ANZ economist Alex Joiner has not changed his CPI forecast for Wednesday, but adds that, apart from price decreases in petroleum refining (down 6.9%), electronic equipment manufacturing (down 9.1%) and industrial machinery and equipment manufacturing (down 2.5%) were also standout contributors to the lower than expected PPI outcome for the December quarter.
The most significant producer price segments to post rises were ‘other’ agriculture (up 11.2%) and building construction (up 0.3%).
CommSec has equally stuck to its previous CPI estimate: up 0.7% q-o-q and 2.3% y-o-y.
Says Commsec economist Craig James: “While the Reserve Bank will be comforted by the broad-based fall in business costs, it will nevertheless realise that it is looking in the rear-view window. The ultimate concern is where prices go from here. And with economic activity getting back to normal, and the Australian dollar likely to consolidate recent gains, it is likely that prices will start ticking higher in the midterm.”
Their combined message: expect the RBA to add 25bp to the official cash rate at the upcoming February meeting.