Fed: Benign producer prices hold out hope for tame CPI outlook

AAP General News (Australia)
04-23-2007
Fed: Benign producer prices hold out hope for tame CPI outlook

By Colin Brinsden, Economics Correspondent

CANBERRA, April 23 AAP - Homebuyers and the government will be hoping for benign inflation
readings tomorrow to head off another interest rate rise next month.

And data released today suggests their prayers may be answered.

The first quarter consumer price index (CPI) is released tomorrow and is expected to
show a pick-up in prices from the surprisingly weak outcome in the final three months
of last year.

The extent of that pick-up will decide whether the central bank raises rates at its
May 1 board meeting, or keeps them on hold, as they have over the past five months.

Homebuyers have already suffered four interest rate rises since the 2004 election,
and the coalition's claim of being the government of low rates will look fairly flimsy
if there is yet another rate hike.

The country goes to the polls in October or November.

However, data released today shows prices for materials paid by business in the first
three months of this year grew at their slowest pace in two years, a sign that manufactured
goods at least won't be rising substantially over the coming months.

Prices were unchanged at the final stage of production in the first quarter compared
to the previous three months, to be 2.8 per cent higher than a year earlier, the Australian
Bureau of Statistics (ABS) said today.

Final stage producer prices grew 3.5 per cent over 2006.

Economists had expected the producer price index (PPI) to rise 0.6 per cent in the
first three months of the year.

While economists stressed that there is no direct correlation between the PPI and the
CPI, they say it does suggest there could be lessening price pressures down the track.

"The benign PPI outcomes for the last two quarters suggest some downside risk to final
prices as measured by the CPI," Royal Bank of Canada senior economist Su-Lin Ong said.

Financial markets wound back expectations for a May rate hike to below a 50 per cent
chance on the PPI report.

Economists expect the CPI to show that inflation rose 0.6 per cent in the first quarter,
for an annual pace of 3.1 per cent.

Such a result would compare with a surprise fall of 0.1 per cent in the fourth quarter.

But on an annual basis, inflation would be slower than the 3.3 per cent growth recorded
over 2006.

This would reflect key inflationary drivers from the first quarter of 2006 - such as
petrol and banana prices - dropping out of the calculations.

But the annual rate of inflation would still be above the central bank's two to three
per cent inflation target.

Shortly after the CPI, the Reserve Bank of Australia (RBA) will release its own preferred
measures of underlying inflation, that smooth out volatile price swings such as in food
and petrol prices, and signal whether price pressures have become embedded in the wider
economy.

Economists expect the average of the two measures - the trimmed mean and weighted median
- to have risen about 0.7 per cent in the quarter and 2.9 per cent over the year.

"If the CPI is moderate tomorrow ... then these benign PPI outcomes will be seen as
a good thing for a low inflation outlook," National Australia Bank chief economist for
markets Rob Henderson said.

AAP cb/ks/sp

KEYWORD: ECONOMY NIGHTLEAD

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