There’s only one question to be answered from this week’s release of the Producer Price Index (today) and the Consumer Price Index (tomorrow) and that is will the annual inflation rate have slowed enough to ease the pressures on the Reserve Bank to lift rates?
Economists surveyed by the likes of Reuters, Bloomberg and AAP news agencies seem to expect a rise in headline inflation of 0.6 per cent in the March quarter, for an annual rate of 3.1 per cent.
The AMP’s Dr Shane Oliver said on Friday: “We are expecting lower food and clothing prices to result in a quarterly inflation rate of 0.6% resulting in 3% for the year to the March quarter.
“Underlying inflation is also expected to be around 0.6% in the quarter or 2.8% year on year.
“An outcome much above 0.6% will almost certainly tip the Reserve Bank into raising interest rates again.”
Of interest will be the impact of an increase in oil and petrol prices in the quarter and some increases in food prices, though nowhere near as enough as we saw in the first six months of 2006 when banana prices went bananas after Cyclone Larry.
A quarterly rate of 0.6 per cent for the quarter and an annual rate of 3.1 per cent would be ‘neutral’ it seems from most economic commentary.
This sort of increase (or lower) would see pressure off rates and the RBA board and for that reason you’d have to expect the Australian dollar will come under pressure and fall.
A good outcome for inflation would allow us to see if the current value of the dollar of around 83.40 USc is as artificial as some analysts think, driven to current levels by traders punting on higher rates and returns here and using cheap yen to finance it.
A result worse than the 0.6 per cent level and we could see the Aussie jump towards the 84 USc mark pretty smartly.
Some economists were on the old story of ‘rate rise looms’ late last week and suggested the Reserve Bank would stick rates up 0.25 per cent at its May meeting next week.
Maybe, maybe not but the one thing that is operating in favour of an unchanged rate stance by the RBA is the strength of the Aussie dollar: it should have shown up in March in particular and we indeed did see that in the import and export indices released on Friday by The Australian Bureau of Statistics.
· “The Import Price Index decreased by 1.7% in the March quarter 2007, mainly due to falls in the import prices of petroleum and related products, telecommunication equipment and copper products,” the ABS commented.
· “This decrease was also partly driven by the appreciation of the Australian dollar against most major currencies. The most significant offsetting price increases were observed for imports of iron and steel products and fertilizers. This quarter’s decrease follows a 3.2% decrease in December quarter 2006.
· “Through the year to March quarter 2007 the Import Price Index decreased 3.0%.
· “The Export Price Index was unchanged in the March quarter 2007, following a 0.2% increase in December quarter 2006.
· “Commodities contributing significant price increases to the index this quarter were iron and nickel ores, wool and barley. The most significant price decreases were reported for exports of copper ores, refined copper, coal and zinc. Through the year to March quarter 2007 the Export Price Index rose 5.8%.”
The phrase “This decrease was also partly driven by the appreciation of the Australian dollar against most major currencies” is what the RBA is looking for.
It’s clear the rising of the Aussie dollar is amplifying the falling value of imports from countries like China and neutralising the steady to slightly higher value for commodity imports, such as oil and petrol.
The rising value of the $A will make an impact on the PPI figures out later today, especially at the raw materials stage which is what the Bank will be keen to see.
On the export side (for the trade figures) the rising value of the Aussie has already started clipping income.
That’s the downside of a stronger dollar.
The real focus will be on the RBA’s preferred measures of underlying inflation – the trimmed mean and weighted median – which it calculates itself using the ABS data. They will be posted Tuesday afternoon on the RBA’s website.
An increase of 0.5 per cent in the March quarter would leave an annual rate of 2.9 per cent, which although not much different to 3.1 per cent, is still that important 3 per cent level.
If that happens, rates won’t rise this year because inflation will fall further in the June and September quarters as the higher prices from 2006.
