Inflation is alive and well and worse than any market analyst had thought it would be at the producer level.
But just how much of the record rise in Producer Price Inflation in the March quarter ends up in tomorrow’s Consumer Price Index is another thing.
The PPI at the final stage hit a record in the March quarter, or almost double the rate forecast by the market in the March quarter.
The Australian Bureau of Statistics said the producer prices at the final stage were up 1.9% in the March quarter, compared to the market estimate of 1.0% and a top estimate of 1.4%.
For the year to June they were up a very solid 4.8% as the surge in the cost of energy and also other commodities drove much of the pressure.
The ABS said that was the biggest rise in the final series PPI since the series started 10 years ago, in 1998; so the inflationary pressures in the economy are substantial, something that might come as a surprise to some in the community.
The figure is triple the 0.6% rise in the PPI at the final stage in the December quarter when import costs were held down by a strong Australian dollar.
The ABS said that in the March quarter, the PPI at the final stage rose 2% for domestic costs and 0.6% for imports. The rise in domestic costs was the sharpest on record as well.
In the year to March though, domestic costs were up a sharp 6.1% and imports off minus 3.8% because of the negative impact of the stronger Aussie dollar late last year.
At the intermediate stage the PPI was up 2% in the quarter and 65% over the year, and at the preliminary stage it was up 2.3% and 6.9%, so strong price pressures in all stages, moderating slightly at the final stage where goods are sold on into the wider economy.
Although there’s no strict correlation between the PPI and the CPI, we can see the strong pressures being exerted by domestic price pressures in parts of the economy, and the strength of the rise in commodity costs. In the preliminary stage the cost of imports jumped 4.9% in the quarter and 12% for the year as the rise in oil, wheat, gold and copper prices burst through the moderating effect of the higher Australian dollar.
The ABS said the final stage domestic component increased due to price rises for building construction (+1.9%), petroleum refining (+10.7%), electricity, gas and water supply (+3.1%) and real estate agents (+4.4%).
The imports component increased due to price rises for dairy product manufacturing (+32.9%), motor vehicle and parts manufacturing (+1.4%) and petroleum refining (+8.2%). These increases were partially offset by price falls in industrial machinery manufacturing (–2.2%) and clothing manufacturing (– 6.7%). The cost of electronic equipment manufacturing was lower (-2.9%).
While the sharp jump in prices does pose a threat to the inflation outlook, the impact at the consumer level is mixed.
Some companies absorb the costs or find ways of mitigating them through productivity: others pass them on in staged increases and not all at once.
As well, with the domestic economy showing distinct signs of slowing, especially housing and retailing, the ability to pass these sorts of price pressures through to the consumer becomes limited.
A good sign of pricing problems will be the inventory figures for the March quarter, which we won’t see for another six weeks.
The March quarter consumer price index will be out tomorrow and is forecast to show a jump in the annual rate to 4.0% or more, well above the Reserve Bank of Australia’s 2%-3% target range.
However, the RBA and Governor Glenn Stevens have made it clear rates won’t rise and it will sit and watch what happens in the economy.
So far this month we have learned that home loan approvals slumped by the most in four years in February, consumer confidence plunged this month to the lowest since 1993, and companies remained pessimistic for a third month in March on concerns about the slowing US economy and the global credit squeeze.
The RBA will lower its forecasts for economic growth and inflation when its second quarterly monetary policy statement for 2008 is released on May 9.
These come on top of the release on Friday of the Import and Export Indexes for the March quarter. They showed a slight improvement in terms of trade in the quarter with the Index for exports rising 3.5%, the fastest increase for over 18 months and the price index for imports rising a solid 2.7%. That was the fastest growth in import costs for almost four years, something which emerged in in the PPI.
The ABS said the oil goods price component of the import trade price index soared 11% in the three months to March, to be a staggering 46.5% higher than a year earlier.
