PPI pushes case for rate cut

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The Australian Bureau of Statistics (ABS) has just released Producer Price Index (PPI) data for the December quarter, which has registered only a 0.3% quarterly increase in final (stage 3) prices – below consensus forecasts of a 0.4% rise – and an increase of 2.9% over the year:

The 0.3% in final (stage 3) prices was driven primarily by rises in the prices received for industrial machinery and equipment manufacturing (+3.2%), other manufacturing (+3.1%) and motor vehicle and part manufacturing (+1.4%), partly offset by partly offset by falls in the prices received for other agriculture (–21.8%) and flour mill and cereal food manufacturing (–6.1%).

The below chart shows the quarterly change in final PPI by component since 2005:

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And below is a time-series of final PPI dating back to the beginning of the series. Note the huge fall in imported costs reflecting the steady appreciation of the Australian dollar:

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Other things equal, this benign result should strengthen the likelihood that the Reserve Bank will reduce official interest rates at its next meeting.

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About the author
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.