Higher import prices add to inflation risks

Export & import prices

• Export & import prices: Import prices rose by 2.1 per cent in the March quarter and were up by 2.3 per cent on a year ago – the fastest annual growth rate in two years. Export prices rose by 4.9 per cent but were down by 1.4 per cent over the year.
• Terms of trade: Based on today’s data we expect that the ratio of export prices to import prices (terms of trade) rose by around 2.5 per cent in the March quarter after rising by 0.1 per cent in the December quarter.
• The terms of trade data is useful in assessing the outlook for the Australian dollar and therefore trade-exposed businesses.

What does it all mean?

• Australia’s terms of trade likely posted the strongest quarterly gain in a year with prices for a raft of key exports such as iron ore, liquefied natural gas, coal and metals, all positing solid gains in the March quarter.
• While import prices also lifted in the March quarter they were out-paced by prices of our key exports, as a result lifting incomes in Australia.
• In terms of implications for inflation, import prices are certainly worth watching. The quarterly lift in import prices in the March quarter was the biggest in almost four years. Oil were the biggest driver of import prices and global crude prices have continued to lift over the past month. The data on consumer prices, released on Tuesday, showed lower prices of tradable goods. If externally-generated price pressures continue to rise (and the Aussie dollar fell further) the annual rate of underlying inflation would be on course for 2.5 per cent over the coming year.

What do the figures show?

Export & import prices

• The Bureau of Statistics (ABS) reported that import prices rose by 2.1 per cent in the March quarter after rising by 2.0 per cent in the December quarter. Import prices increased by 2.3 per cent over the year – the fastest growth rate in two years. Prices were driven by Mineral fuels, lubricants and related materials (+10.5 per cent).
• The ABS said: “The rise was driven by higher prices paid for Petroleum, petroleum products and related materials (+8.7 per cent), reflecting tight worldwide supply due to global production restrictions and capacity constraints. Road vehicles rose 1.5 per cent, owing to increases in the price of raw materials. Inorganic chemicals rose 19.7 per cent, largely driven by caustic soda, demand for which has increased for a number of industrial processes. Prices of Plastics in primary forms rose 14.7 per cent, as a result of reduced supply of recycled plastic and increased demand in China for plastics for pipes and tubes. These rises were partly offset by falls in Medicinal and pharmaceutical products (-4.1 per cent).”
• Eight of the ten broad import categories recorded price increases in the March quarter.
• Export prices rose by 4.9 per cent in the March quarter. This follows a 2.8 per cent lift in the December quarter. Export prices are down by 1.4 per cent over the year.
• The ABS said: “Prices received for many of Australia’s mining commodities rose in the March quarter 2018. Metalliferous ores and metal scrap prices rose 6.1 per cent, driven mainly by rises in iron ore as Chinese manufacturers continued to build stockpiles. Coal, coke and briquettes rose 6.5 per cent, reflecting demand from China as well as local supply disruptions. Gas, natural and manufactured, rose 13.8 per cent, in response to strong demand for LNG in northern Asia for heating. Export contract prices for LNG are also influenced by the international crude oil price with a two to four month lag. Petroleum, petroleum products and related materials rose 9.6 per cent, reflecting tight worldwide supply due to global production restrictions and capacity constraints. Non-ferrous metals rose 4.8 per cent, driven by rises in Nickel, Copper, Zinc and Aluminium. Live animal export prices rose 22.2 per cent, reflecting increased demand for cattle, and road transport disruptions. Offsetting the rises were falls in Sugar, sugar preparations and honey (-8.6 per cent) and Power generating machinery and equipment (-2.9 per cent).”
• Eight of the ten broad export categories recorded price increases in the March quarter.
• The ratio of export prices to import prices (a proxy for the terms of trade) rose by around 2.5 per cent in the March quarter after rising by 0.1 per cent in the December quarter.

What is the importance of the economic data?

• The Australian Bureau of Statistics (ABS) provides quarterly estimates of export and import prices. The figures assist is gauging inflationary pressures in the economy.

What are the implications for interest rates and investors?

• The global economy is in good shape and that is serving to lift prices of our key exports and, in turn, boosting incomes of our key producers. Clearly this is positive for our trade situation, positive for investors and positive for the government in terms of tax revenue. Interestingly it is not just coal and iron ore prices that have been doing well – prices of alcoholic and non-alcoholic beverages are rising at the fastest annual rate in 27 years of records.
• Prices of imports are lifting – and this needs to be watched from an inflation standpoint. Even prices of imported cars are lifting, although the price index has only lifted to the level it was around nine years ago. In the consumer price index, car prices rose 1.4 per cent in the March quarter – the biggest quarterly rise in 13 years.
• CommSec expects interest rate stability through to at least the end of 2018.