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Weak producer prices hint at rate cut, say economist

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A weak reading for inflation at the farm and factory gate has further heightened expectations that the central bank will cut interest rates in May.

The producer price index (PPI) at the final stage of production fell 0.3 per cent in the March quarter for an annual rise of 1.4 per cent, the Australian Bureau of Statistics reported on Monday.

Economists’ forecasts had centred on a March quarter PPI rise of 0.5 per cent.

The PPI is a measure of inflation and can influence expectations for the more closely watched March quarter consumer price index (CPI) due on Tuesday.

Economists expect a benign quarterly CPI figures will sway the board of the Reserve Bank of Australia (RBA) to cut the cash rate after its May 1 meeting.

RBA governor Glenn Stevens has indicated a cut in the cash rate from its current 4.25 per cent level was likely if inflation had moderated further.

HSBC Australia chief economist Paul Bloxham said the benign PPI made a weak March quarter CPI more likely, opening the door to an interest rate cut.

“The bottom line is, will inflation be low enough to see the RBA cutting rates next week, and we see the PPI as evidence that it’s likely,” he said.

Mr Bloxham said the weakness in the PPI data would not definitely transfer through to the CPI.

“You’ve always got to be a bit careful about that

“There is some relationship between producer prices and consumer prices but it’s not that close a fit.

“I think the better way to suggest it is that there now is more risk that the (CPI) inflation number will be low.”

AAP’s survey of 17 economists on Friday revealed a median forecast for the CPI to show an annual underlying inflation rate of 2.4 per cent, within the RBA’s target range.

RBC fixed income and currency strategist Michael Turner said a 1.2 per cent fall in March quarter import prices, reported on Friday, suggested the PPI would be weaker than first thought.

“I think the thing to note here was the fall in agricultural prices (down 17.7 per cent).

“So mainly food prices were the big move down in the quarter, which was largely responsible for the softness in today’s numbers,” Mr Turner said.

“There’s a bit of downside risk to tomorrow’s CPI figures, there’s probably a bit of downside risk to that headline number after seeing softness in food prices today in the PPI.”

Mr Turner said the PPI figures were unlikely to affect the underlying inflation figures, which remove components of the index that record extreme quarterly movements.

He said the market was almost convinced there would be a May interest rate cut by the RBA.

CommSec economist Savanth Sebastian said a high Australian dollar was leading to lower import prices.

“Import prices have continued to slide, and even domestically produced goods prices are low suggesting that there is significant discounting taking place,” he said.

Mr Sebastian said the RBA would be relieved by the suggestion of low prices facing Australian businesses.

“It (the PPI) highlights that inflation is in check from a business sense, so businesses aren’t going to be passing on significant price hikes,” he said.