RBA take comfort from fall in producer inflation – economists

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A fall in a measure of inflation at the wholesale level is likely to comfort the Reserve Bank of Australia (RBA) as it attempts to stimulate the local economy, economists say.

Producer prices at the final stage of production fell by 0.4 per cent in the March quarter, the Australian Bureau of Statistics (ABS) said on Monday.

It was the largest fall in a quarter since June 2003.

In annual terms, the producer price index (PPI) grew four per cent to March 31, the slowest pace since the December quarter of 2007.

Import prices at the final stage of production increased by 3.9 per cent in the year to March, while domestic prices fell by one per cent.

JP Morgan economist Helen Kevans said inflation had become less of a concern for the central bank as it attempts to reduce the effects of a downturn in the economy.

“RBA officials won’t be sitting on the edge of their seats in anticipation of this week’s inflation data,” Ms Kevans said.

“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.”

St George Bank Treasury economist Amanda Tan said the costs of imports rose during the second half of 2008 following a significant depreciation in the Australian dollar but the currency steadied in the March quarter.

“Accordingly, while imported costs still rose, they were much less of an influence on the overall PPI,” Ms Tan said.

“Domestically driven prices have been weighed down by the sharply slowing domestic economy.”

CommSec chief economist Craig James said a downturn in the global economy and a fall in the price of oil contributed to the March result.

The prices of materials at the intermediate stage of production fell 3.2 per cent in the March quarter, while the price index for materials at the preliminary stage dropped 4.6 per cent – the biggest fall since the series started in 1998.

“On average, the Aussie dollar remained relatively stable over the March quarter, however the global economic slump resulted in a 25 per cent fall in the oil price when compared with the December quarter,” Mr James said.

Economists surveyed by AAP last week forecast prices to rise 0.5 per cent in the three months to March 31, when the ABS releases the consumer price index report on Wednesday.

This would lower the annual rate of inflation to 2.9 per cent from 3.7 per cent recorded in the 12 months to December.

AAP

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