Australia | Oct 20 2008
By Andrew Nelson
By now you may have heard the Q3 PPI numbers were much higher than expected, increasing by 2.0% compared to expectations for a rise around 1% and lifting the annual rate to a record high 5.6% from 4.7% last quarter. The result, even though it’s the highest quarterly rate since the series commenced in 1998, doesn’t mean we should see any acceleration in the RBA’s stance.
The largest contributions this quarter came from building construction, which was up 1.8%, electricity, gas and water up 7.4% and dairy product manufacturing, which increased 5.5%. These factors were partly offset by falls in motor vehicle parts, down 2.4%. Importantly, the price of materials used in house building increased by 2.6% in Q308 and by 6.4% through the year, and prices for manufacturing inputs increased by a larger 6.0% in the quarter and by a massive 21% through the year.
ANZ Economist Riki Polygenis points out producer price inflation is now coming from both domestic and imported sources as the AUD falls, in contrast to earlier in the year, when higher domestic input prices were being offset by lower imported prices as the AUD climbed.
Commonwealth Bank Senior Economist Michael Workman agrees on this point and expects a few more some big PPI rises are coming down the pike. In his view, this will be due to the 23% fall in the AUD Trade Weighted Index from its 74.1 peak in late July to the current 56.5, which will see the imported components of the PPI continue to surge higher in coming quarters.
Although the PPI data tend to be more volatile than the CPI, the RBA still monitors the PPI for upstream inflation trends. But Polygenis reasons that despite the stronger than expected measures of pipeline inflation as indicated by the jump in PPI, she doubts that neither policymakers nor the financial markets will “over read” the results.
Joshua Williamson from TD Securities thinks that today’s data suggest the slowing economy and global recession risks have not stopped wholesale inflation from accelerating and that previous pockets of inflation in the housing sector have intensified.
Westpac points out that the key component for its CPI forecast is house construction output prices and these were certainly higher than expected, but not high enough to cause the bank to make an upward revision to its headline core CPI forecasts. Conversely, economist Workman is expecting a big headline CPI number, with a rise of 1.2% likely to push the annual inflation rate up to 5.0%.
However, he doesn’t see the inflation issue as all that important right now and with more focus on domestic growth the general belief is that the PPI and CPI outcomes will moderate in 2009 and 2010 anyway. Williamson agrees for the most part, believing that the RBA has bigger fish to fry and that with the banks doing some of the central bank’s work in lowering interest rates, the RBA will be more likely to tread more cautiously in easing monetary policy.
Polygenis sees the latest numbers as reminding policy makers of the powerful inflationary forces that were running through the economy right up to the latest bout of financial disruption, which should serve to add caution to the mix. Ultimately, these newest numbers are almost meaningless as long as global financial chaos dominates both the national and international economic and financial outlook.
Inflation risks will eventually subside, she says, and in twelve months from today it’s more than possible that the opposite problem of rampant deflation may be the biggest problem facing Australian and international policy makers.