Australian producer prices fell 0.4%q/q

Australian producer prices at the final stage of production fell 0.4%q/q in the March quarter (J.P.Morgan -0.1%, consensus +0.6%), after spiking 1.3% in 4Q. The 1Q result translated to a 4.0%oya rate, compared to 6.4% previously, which was the highest rate on record. Growth in prices at the preliminary and intermediate stages of production slowed significantly, rising 4.3%oya and 3.9%, respectively.

The 0.4%q/q fall rise in producer prices at the final stage was mainly owing to a fall in prices of domestically produced items (-1.0%), driven lower by petroleum refining (–10.0%). The imports component increased (+3.9%) – big import price gains were recorded in industrial machinery and equipment manufacturing (+6.9%) and tobacco product manufacturing (+23.2%).

At the intermediate stage, prices were down 3.2%q/q over the quarter. Domestically produced items fell 2.3%, dragged lower by significant falls for basic non–ferrous metal manufacturing (–20.8%) and metal ore mining (–13.3%). The 8.3% decline in the price of imported items stemmed from large falls in oil and gas extraction (–39.3%) and dairy product manufacturing (–35.7%).

Producer prices also were down at the preliminary stages of production, falling 4.6%q/q. The 2.7% slide in prices of domestically produced items was due to basic chemical manufacturing (–20.2%) and non–ferrous metal manufacturing (–20.8%). Import prices tanked 16.0%, thanks mainly to sharp falls in oil and gas extraction (–39.3%).

The market’s attention now turns to Wednesday’s 1Q CPI report. We forecast headline inflation at 2.6%oya in 1Q, back within the RBA’s 2-3% target range, or 0.2%q/q. We are on the low side of the consensus forecast of 0.5%q/q, as we were with today’s PPI. On our forecasts, lower prices in the housing and automotive fuel components, and falling import prices, will keep a lid on price gains at the consumer level. Elevated food prices, rising rents and higher utility prices will make significant positive contributions.
All that said, with respect to monetary policy, RBA officials won’t be sitting on the edge of their seats (like they once did) in anticipation of this week’s inflation data. Inflation issues have moved to the back burner. We expect further modest rate cuts from the RBA, particularly given that it will be difficult for RBA officials to sit on their hands as the unemployment rate rises sharply in the months ahead.
The minutes from the RBA’s meeting on April 7 are scheduled for release tomorrow, and may provide further clues about the timing of the RBA’s next move. The size of future cuts to the cash rate are likely to be 25bp, however, given the RBA at its last meeting re-calibrated rate moves to 25bp from the mammoth 100bp cuts we saw late last year and in February.

ENDS

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