Prices paid to Australian producers rose in the September by almost twice as much as economists had forecast as costs for energy, water and construction jumped.
Figures from the Australian Bureau of Statistics yesterday showed a 2% rise in the final stage of production and 5.6% over the year to September.
The quarterly rise largely reflected a 7.4% in electricity, gas and water prices, while dairy product manufacturing rose 5.5% and building construction rose 1.8%, according to the ABS.
The reading for the year to September was less than PPI readings in China (10% at last report over the year to August), over 9% and 10% respectively in the US and UK in the year to July and August (but now easing as oil prices and recession ease the pressures).
But it’s a bit worse than expected by the market which was looking at a 1.2% quarterly rise, and double the 1% increase in the June quarter. Higher import costs were also blamed, and that’s down to the plunge in the value of the dollar since July.
No one knows, but the RBA does seem to be more concerned about growth evaporating than prices rising.
After all the central bank has been telling anyone who would listen the annual rate in this quarter (and possibly in the December quarter) will be high at around 5%.
Tomorrow sees the release of the consumer inflation figures for the September quarter. While those PPI increases don’t feed all that cleanly into the CPI, they can be an indication.
Concern about unemployment is also an interpretation that more forward looking economists took from the Reserve Bank’s 1% cut in its cash rate almost a month ago: economists like those at Goldman Sachs JBWere who reckon we are in a recession now, or close to it.
We are now ‘enjoying’ sub-trend growth (i.e. a level of growth below the long term performance of the economy: about 3% a year growth in GDP give or rate a point or three).
In fact the level of growth in prices fell from the preliminary to the final stage of production by a quite noticeable amount (the quarterly increase at the preliminary level was 5.5% for the quarter; it was 3.7% at the intermediate stage and 2% at the final stage.
Likewise the annual figure was up 13.3% at the preliminary stage (with oil and fuel costs a major reason), 9.7% at the preliminary stage and 5.6% at the final stage.
That’s usually indicative of companies absorbing the price pressures in slimmer margins or cost cutting, such as cutting labour.
So far jobs losses have been scattered, but not economy wide, so companies are eating the price pressures by cutting their profit margins where they can or have to.
The CPI for September quarter looks like coming in by around 0.9% to 1.2% and the full year figure by 4.9% to perhaps 5.2% but the Reserve Bank’s own measures look like remaining unchanged at around 4.4%.
Normally, that would be enough to get the bears chanting ‘rate rise looms’.
But these are very different days; it’s all about rate cuts, as we will find later this morning from the minutes of the October 7 RBA board meeting which produced the 1% cut (the largest since May, 1992) and then a speech a couple of hours later from RBA Governor, Glenn Stevens in Sydney.
JPMorgan economist Helen Kevans told AAP the weaker Australian dollar had also contributed to the big jump in producer prices during the September quarter, and could delay production price falls in coming months.
"If we see commodity prices come off, the PPI should come down but if we see too much weakness in the Aussie dollar, that will offset falls in import prices," she said.
Elevated import prices were a big driver of the higher than expected producer price index.
"A lot of this increase (in producer prices) can be attributed to higher import costs: that’s not surprising given the Australian dollar lost more than 17 per cent in the third quarter (of 2008)," Ms Kevans said.
"At the same time, the data essentially indicated prices are rising rapidly, at the preliminary and intermediate stages, and profit margins are being squeezed."
The Australian dollar fell from a 25-year high of 98.49 USc, in mid July, to levels marginally below 80 USc in September.
Ms Kevans said high producer and consumer price inflation numbers would not stop the RBA cutting rates next month and December.
And Bloomberg reported a thawing in the credit freeze as Australian banks’ borrowing costs fell to the lowest level since before the Lehman Brothers collapse in mid-September, according to a gauge measuring funding availability and the outlook for central bank interest rates.
Banks were charging each other 0.57% more for three-month loans than the overnight indexed swap rate in Sydney, narrowing from 0.75% last Friday. The gap has averaged 0.44% points this year.
Perhaps that thawing in the freeze is why the local stockmarket surprised with a much stronger day yesterday, even though banks and other groups dealing with the RBA kept a near record $A10.9 billion in their exchange settlement accounts over the weekend.
