The broad measure of business inflation – the producer price index (PPI), or final stage prices, – rose by 0.3 per cent in the March quarter to stand 1.6 per cent higher than a year ago.
What do the figures show?
- The Producer Price Index (PPI), or final stage prices, rose by 0.3 per cent in the March quarter to stand 1.6 per cent higher than a year ago. Previously, in the December quarter, the PPI rose by 0.2 per cent to stand 1.0 per cent higher than a year ago.
- Of final stage prices, domestic good prices rose by 0.4 per cent while import good prices fell by 0.4 per cent.
- The Bureau of Statistics notes that the 0.3 per cent lift in final stage prices was mainly due to rise in the prices received for “mainly due to rises in the prices received for building construction (+0.8%), other agriculture (+6.1%) and petroleum refining and petroleum fuel manufacturing (+4.2%). Partly offsetting these rises were falls in prices received for pharmaceutical and medicinal product manufacturing (–4.8%).
- Consumer good prices rose by 0.3 per cent in the quarter while capital good prices rose by 0.4 per cent. Over the year, prices of consumer goods rose by 1.8 per cent, while capital goods rose 1.1 per cent.
- Prices of intermediate goods were unchanged in the quarter to stand 1.5 per cent higher over the year. Preliminary stage materials rose by 0.2 per cent in the quarter to be 1.5 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 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. And given the timing of the produce price data until after the Consumer Price Index it will most probably becomes less relevant for forecasters. 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 relatively subdued business inflation reading was largely driven by the appreciation in the Australian dollar. In fact prices of domestic goods rose by just 0.4 per cent, while imported goods slumped by almost 0.4 per cent in the March quarter. As we discussed in our report on consumer prices last week, the substantial slide in imported prices will ensure that the Reserve Bank remains comfortable that inflation remains well contained – especially given that the Aussie dollar is likely to hold around current levels over the coming year.
- The data also confirms that the tough trading conditions that have been faced by businesses over the past year is moderating. The difference between final stage and preliminary producer inflation was 0.1 percentage points in annual terms – highlighting that margin expansion occured in the March quarter albeit at a rather moderate pace. Interestingly the expansion in margins was the first positive result we have seen in three years.
- Overall there is nothing in the latest PPI data to worry the Reserve Bank – it is clear that inflation remains relatively mild. The risks certainly lie with a further rate cut over the near term. However CommSec does not expect rates to be cut next week. Rather polickymakers are likely to await on the Federal Budget before deciding if a further rate cut is necessary.