Interest rates may be on-hold for longer than previously expected, after official data showed a measure of inflation had eased in the September quarter.
Australia’s producer price index at the final stage of production rose 0.6 per cent in the September quarter, for an annual rise of 2.7 per cent.
That compared with a 0.8 per cent rise in the June quarter.
Economists’ forecasts had centred on a September quarter PPI rise of 0.8 per cent.
The PPI is a key measure of inflation and can influence expectations for the more important consumer price index (CPI).
PPI measures prices “at the factory or farm gate”.
HSBC chief economist Paul Bloxham said the headline figure was lower than his forecast.
“It certainly shows signs that inflationary pressures have eased a bit in the Australian economy,” Mr Bloxham said.
“This is consistent with what the Reserve Bank of Australia (RBA) is thinking would be happening and the fact that they seem to have reduced their concerns about inflationary pressures building.”
He said the data suggests Wednesday’s consumer price index (CPI) may come in lower than market forecasts.
The RBA uses the CPI as a key gauge of inflation in the economy and a guide to setting the cash rate.
“I think the Reserve bank has become less concerned about inflationary pressures building in the Australian economy but at this stage we think it’s still likely to keep them on-hold rather them cut interest rates.”
He said the PPI data added to the case for the central bank to keep rates on-hold longer than what the market has been expecting.
In the September quarter, at the intermediate stage, the PPI was up 0.1 per cent, while at the preliminary stage it also rose 0.1 per cent, the Australian Bureau of Statistics said on Monday.
Over the year to September, at the intermediate stage the PPI rose 4.5 per cent and at the preliminary stage it was up 5.6 per cent.
Macquarie Group senior economist Brian Redican said the September quarter PPI was better than expected.
“The main thing pushing up prices in the third quarter was those higher utility charges, in particular electricity prices and as we all know that will be reflected in the consumer price index numbers on Wednesday,” he said.
“Probably the better surprise was the decline in building construction costs, that’s a big chunk of overall producer prices and that actually fell in the third quarter.”
“Moving into the CPI there’s a slight downside risk but I don’t think it will be sufficient for anyone to change their forecasts on the basis of these numbers.”
Mr Redican said if the September quarter CPI, the key measure of inflation, is as low as the PPI then an interest rate cut is a possibility next week.
“We think if you get that sort of 0.6 per cent outcome for consumer prices in the third quarter that opens the door for a rate cut in November, so we think it’s a real possibility,” he said.
The September quarter CPI is expected to have risen by 0.6 per cent for an annual rate of 3.5 per cent, according to an AAP survey of 12 economists.
JP Morgan economist Ben Jarman said the data was a little softer than expected but did not provide a clear picture of how the more important CPI figures would appear on Wednesday.
“I think there are a few things going on, none of which feed through to the domestic demand story,” Mr Jarman said.
“I think generally you’re seeing pipeline pressures building rather than easing over the last year or so and firms are not getting that much relief on the margins.”
Mr Jarman said Wednesday’s CPI figures will be closely watched.
“The RBA made it pretty clear that that’s an important one this time around because the inflation numbers for the first half of the year were revised down from core measures,” he said.
“They need to see evidence that that theme’s continuing to be more comfortable around the inflation outlook.”
