Australia: 4Q PPI dragged lower by falling prices

Australia Economic Research

Australia: 4Q PPI dragged lower by falling import prices

 
Producer prices in Australia fell 0.4%q/q at the final stage of production in 4Q (J.P. Morgan: 0.6%, consensus 0.1%), after rising 0.1% in the previous three months. Though the headline number was much weaker than expected, it is important to note ahead of the all important fourth quarter CPI report (due Wednesday) that the PPI numbers do not feed directly into our CPI model. Our 4Q CPI forecast, therefore, remains unchanged.
 
The fall in producer prices in 4Q owed mainly to strong AUD, which helped drag import prices down at each stage of production. Import prices were down 5.2%q/q at the final stage of production, 3.9% at the intermediate stage, and 32% at the preliminary stage.
  
Further, at the final stage of production, significant price declines were recorded in petroleum refining (-7%) and electronic equipment manufacturing (-9%). Prices at the intermediate and preliminary stages of production were down 0.9% and 0.8%, respectively, over the quarter, both owing to considerable price declines in grain, sheep, beef and dairy cattle farming, iron and steel manufacturing, and petroleum refining.
 
The market’s attention remains firmly centered on the 4Q CPI numbers expected mid-week. Headline inflation probably returned to the middle of the RBA’s 2%-3% target range in the December quarter. More importantly, the core inflation measure probably remained at 3.2%oya, again above target, and on our forecast will barely deviate from that elevated level throughout 2010. This medium-term outlook will, of course, be a key concern for the RBA.
With respect to the RBA’s upcoming February Board meeting, given the slew of remarkably strong economic data released in Australia of late, the 4Q CPI report is not likely to alter our expectation that another 25bp rate hike will be delivered at the first Board meeting of the year. Following the labour force and retail sales reports, in particular, the case of an imminent rate hike remains strong, as does the case for the steady removal of the policy accommodation throughout 2010.

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