The Producer Price shock has set up a lot of interest in the March quarter Consumer Price Index out later today.
No one is calling ‘rate rise looms’ as a result of either the PPI surge (the largest on record of 1.9% headline and 1.6% core) or the expected headline and core CPI of around 3.9% to 4.2%.
But as Goldman Sachs JBWere remarked yesterday, it would have been enough to give the Reserve Bank a bit to chew on between today and the next board meeting on May 6.
Between now and then we will get a Fed meeting in the US that could go either way: a small rise of 0.25% (some say another 0.50%) or no move but a signal to cut if conditions worsen.
Goldman Sachs said in a note yesterday that their forecasts for the CPI remained above market median of a 1.1% rise (quarter on quarter).
They were tipping a 1.3% jump, for annual headline rate of around 4.2%. That puts them at the top of the forecasts from the market.
The firm said underlying inflation was forecast to be 1% by the firm and 0.9% for the market.
Goldman said it was expecting "significant increases likely in petrol, rents, deposit and loan facilities, house purchase and a range of food items, a strong underlying inflation print is all but assured".
It warned that the "rising cost environment evident in the strength of producer prices suggests significant margin pressure. A slowing sales environment suggests we are well past the peak in the profit cycle.
"With growth moderating but near-term risks to its inflation forecast to the upside, the RBA is in an increasingly uncomfortable position.
"While markets could further re-evaluate the likelihood of near-term tightening, we believe that the moderation in activity already underway is significant enough to assure us that we are at the peak in the cash rate cycle. The ongoing strength in underlying inflation data does reduce the likelihood of an early commencement to the easing cycle.
"We continue to believe the first rate hike will be delayed until 2Q 2009."
For fiscal policy in the budget the firm said the "Increased risk of near-term tightening will exert considerable discipline on the Federal government as it frames this year’s budget for its announcement on May 13".
In other words, putting some steel into the backs of the Federal Cabinet.
Citigroup however wasn’t as worried about inflation.
In fact in a note to clients yesterday ahead of today’s ABS release, it said that the tightening in monetary policy and the global financial development would cause the economy to slow by more than the RBA was expecting.
"We expect another high inflation (Consumer Price Index, CPI) reading for the March quarter. We estimate the headline CPI could rise 1.2%, taking the annual rate to 4% and the underlying measure could rise 0.9%, pushing the annual rate to 3.8%.
"Import prices rose sharply in the March quarter and it will take time for the slowing economy to moderate domestically generated inflation pressures. We forecast inflation to return to around the top of the target band next year.
"However, inflation is no longer as key to the Reserve Bank of Australia’s (RBA) deliberations as it has been during the last 12 months.
"The tightening to date and global financial developments are now clearly impacting the economy and economic growth probably will slow more sharply than the RBA expects.
"Recent data prints have been surprisingly weak (two monthly falls in retail sales, a fall in vehicle sales, a large drop in housing finance, and an easing in credit growth).
"We continue to expect the RBA to hold interest rates at current levels this year before easing by mid 2009. However, the RBA would need to counter any significant tightening in credit availability to prime borrowers with lower official interest rates."
