Business

Tuesday July 21, 2009

Record fall in Australia’s producer prices


SYDNEY: Australian producer prices fell the most in a decade last quarter as the price of imported machinery and electronics slid, another sign of abating inflationary pressures that should help keep interest rates low.

The surprisingly subdued result augur well for a benign reading on consumer prices, due on Wednesday, which would provide room for the Reserve Bank of Australia (RBA) to cut rates again should the economy not recover as expected.

“For the RBA, today’s (yesterday’s) data would be pleasing, with all measures of upstream prices now clearly passed their peak – and sufficiently weak to signal a definite slowing in core CPI over coming quarters,” said George Tharenou, an economist at UBS.

Earlier this month the central bank kept rates at a record low 3% and said there was scope for further easing if necessary given the outlook for slower inflation.

A man stands in front of the RBA. The subdued result gives the central bank room to cut rates again should the economy not recover as expected. — Reuters

Prices at the final stage of production fell 0.8% in the three months to end June, after a 0.4% dip the previous quarter. That easily outstripped the 0.1% drop forecast by analysts and was the largest fall since the series began in 1998.

For the year, producer price inflation stood at 2.1%, down from 4% the previous quarter and the lowest since early 2004.

Import prices fell a steep 5.9% in the quarter, in part due to a jump in the Australian dollar. Industrial machinery dropped 8.3%, electronics 11.2% and clothing 10.7%, outweighing an increase in the cost of petrol refining. Domestic prices were flat overall in the second quarter, with a drop in overall building costs offsetting a rise in the cost of car manufacturing.

One disappointment was a 1.4% rise in house building costs, which could feed into the consumer price index (CPI).

“The much weaker-than-expected PPI may not fully translate through to CPI given the strong rise in house construction costs,” said Tharenou of UBS. “That said, the record fall in PPI still suggests downside risks to market expectations of CPI.”

The median forecasts are that the CPI rose a modest 0.5% in the second quarter, dragging the annual pace down to 1.5% from 2.5% the previous quarter. That would be a sharp turnaround from the 5% peak posted just three quarters before.

Much of the moderation was thanks to lower oil and commodity prices and a drop in financing costs as interest rates were cut aggressively. — Reuters

However, the RBA’s measures of core inflation, which strip out the biggest price moves in any quarter to find the underlying trend, have proved far more stubborn.

The annual pace of underlying inflation is thought to have been 3.8% last quarter, down from 4.1% in the first quarter but still well above the RBA’s 2% to 3% target band. That owes much to price rises in the non-tradeable services sector, particularly education and healthcare, which are relatively immune from global competition.

JPMorgan economist Helen Kevans suspects underlying inflation could remain above 3% right out to the end of next year.

“This is a significantly less benign profile than the RBA forecasts, which currently show core inflation well below target in 2011,” she argued.

“With the economic outlook having brightened, RBA officials probably will be more nervous about the medium-term inflation outlook, reaffirming our view that the easing cycle has ended,” Kevans said. — Reuters


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