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PPI rise shouldn’t prevent rate cuts

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A rise in Australia’s June quarter producer price index could mean Wednesday’s inflation data will be stronger, but it should not prevent more interest rate cuts by the central bank, economists say.

The PPI at the final stage of production rose 0.5 per cent in the three months to June, for an annual rise of 1.1%.

This compares with a 0.3% fall in the March quarter.

The producer price index is the measure of prices at the factory or farm gate before transport and other costs are added. The PPI data feeds into the consumer price index (CPI).

RBC fixed income and currency strategist Michael Turner said the components that correlate best to Wednesday’s headline CPI were modest.

“Some of the indicators today present very modest downside risks to our headline CPI forecast of 0.6 per cent for the June quarter,” he said.

June quarter CPI figures will be released on Wednesday, and Mr Turner does not think they will be high enough to pose a hurdle to the Reserve Bank of Australia (RBA) if it wants to cut the cash rate again.

“We suspect this (PPI) result will be modestly pleasing to the RBA, who appeared fearful that once the exchange rate stopped appreciating, it would expose uncomfortable domestic inflationary pressures,” Mr Turner said.

“These fears may be allayed somewhat judging by today’s data – though, of course, the litmus test will be the CPI data on Wednesday.”

Commonwealth Bank senior economist Michael Workman said the rise in the PPI was mainly driven by import prices and a rise in agricultural prices.

“A large oversupply in the agricultural food markets resulted in falls in wholesale and CPI food prices in the March quarter,” he said.

“In the June quarter these items appear to have partially reversed previous falls, which means upside risks to the food component of the June quarter CPI.”

Mr Workman said the lower Australian dollar in the second three months of the year, which makes imports dearer, was also a factor in the fall in producer prices.

“The benefits of the high Australian dollar seems to have been used up for the time being, with imported price pressures being more pronounced in the quarter,” he said.

“Imported price rises were reflected by price increases in imported industrial machinery and equipment manufacturing and clothing manufacturing.”