The broad measure of business inflation – the producer price index (PPI), or final stage prices, – fell by 0.3 per cent in the March quarter – marking the biggest quarterly fall since December 2009. The result was well below forecasts for a 0.5 per cent rise.
The fall in inflation was largely driven by an appreciation in the Australian dollar over the quarter. The prices for domestically produced goods fell by 0.1 per cent while import good prices fell 1.5 per cent. China’s HSBC Flash PMI rose from 48.3 to 49.1 in April.
What does it all mean?
The producer price index doesn’t track the consumer price index very closely, as it tends to be influenced by volatile factors such as the global oil price and the Australian dollar. Still, it’s worth keeping an eye on in order to track the cost pressures facing business and the implications for profitability.
It is clear that the strength of the Australian dollar has been a key factor in keeping down the cost of imported goods. In fact prices of imported goods recorded the biggest quarterly fall in five quarters. And looking forward the ongoing strength of the dollar should ensure that imported inflation remains subdued.
Given the sluggish domestic environment, the cheaper prices for imported goods have provided retailers with a life-line. Providing domestic business with the ability to discount goods in order to entice consumers.
Even more encouraging domestic produced goods also recorded a modest fall in prices over the March quarter. In the current environment – with consumers closely watching their pennies – it’s more likely that businesses would seek to absorb higher costs rather than passing them through to final buyers. It seems like most businesses are choosing to reduce prices or leave them unchanged.
In fact while trading conditions are still tough, margin continue to be squeezed, they contracted at a slower pace. The difference between final stage and preliminary producer inflation was 2 per cent points in annual terms – the smallest annual contraction in five quarters.
Interestingly the milder contraction in the flash Chinese PMI numbers should provide investors with a degree of encouragement. The latest result adds to further evidence that a soft-landing taking place in China. Chinese authorities have managed to keep price pressures in check and ensure sustainable longer-term growth.
Overall there is nothing in the latest PPI data to worry the Reserve Bank. Rather the latest result should make the Reserve Bank even more comfortable that over the mid-term inflation remains well contained. Given the softness of the economy, we expect the Reserve Bank to cut interest rates at its May meeting. The inflation data released tomorrow will be the last key data release that the Reserve Bank will draw the Reserve Bank’s interest.
What do the figures show?
The Producer Price Index (PPI), or final stage prices, fell for the first time in over two years, down by 0.3 per cent in the March quarter to stand 1.4 per cent higher than a year ago. The result was lower than economists’ expectations. Previously, in the December quarter, the PPI rose by 0.3 per cent to stand 2.9 per cent higher than a year ago.
Of final stage prices, domestic good prices fell by 0.1 per cent while import good prices fell 1.5 per cent.
The Bureau of Statistics notes that the 0.6 per cent lift in final stage prices was mainly due to falls in the prices received for “other agriculture (–17.7 per cent), building construction (–0.2 per cent) and industrial machinery and equipment manufacturing (–2.4 per cent) were partially offset by rises in the prices received for electricity, gas and water supply (+2.1 per cent) and tobacco product manufacturing (+7.8 per cent).
Consumer good prices fell by 0.4 per cent in the quarter while capital good prices fell by 0.1 per cent. Over the year, prices of consumer goods rose by 2.1 per cent – the smallest annual increase since March 2010, while capital goods rose 0.9 per cent.
Prices of intermediate goods rose by 0.3 per cent in the quarter to stand 2.8 per cent higher over the year. Preliminary stage materials rose by 0.1 per cent in the quarter to be 3.4 per cent higher than a year ago.
What is the importance of the economic data?
The producer price figures are important in flagging price pressures at an early stage. If business costs are rising, the risk is that these will be passed on in terms of higher prices of final consumer goods. The Consumer Price Index is regarded as the key gauge of economy-wide inflation.
What are the implications for interest rates and investors?
The data over the past couple of weeks have shown no clear signs of substantial or sustainable improvement in economic conditions. And today’s data will ensure that the Reserve Bank is more comfortable when it comes to easing rates.
The Reserve Bank has plenty of scope to cut interest rates, and we anticipate policy makers will look to do just that at the May meeting – that is, reduce interest rates by a quarter of one per cent.
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