Fed:Business price pressures a warning for consumer inflation

AAP General News (Australia)
04-27-2010
Fed:Business price pressures a warning for consumer inflation

By Colin Brinsden, Economics Correspondent

CANBERRA, April 27 AAP - Renewed inflation worries could well see the Reserve Bank
of Australia (RBA) raise the cash rate for a third month in a row when its board meets
next Tuesday.

Financial markets have yet to price such an occurrence, but economists say it is a
risk after new data on Tuesday showed the cost of materials for business accelerated at
their fastest pace in 15 months.

The more influential consumer price index (CPI) for the March quarter is released on Wednesday.

RBA Governor Glenn Stevens appeared to hang the outcome of CPI as a key factor for
the May board meeting in the opening remarks of a speech on the economic outlook last
Thursday.

"We, and everyone else, will have an opportunity to update our thinking on the current
and likely future course of inflation," Mr Stevens said.

JP Morgan economist Ben Jarman said Mr Stevens comments may have purely reflected the
fact that it is uncommon to offer commentary so close to an inflation result.

"But it could also indicate that the official view on the inflation outlook is more
fluid than normal," Mr Jarman said.

Tuesday's release of the producer price index (PPI) for the March quarter will give
the RBA board food for thought, showing a rebound in price pressures at all stages of
production.

The PPI at the final stage of production rose by a solid 1.0 per cent in the first
three months of the year, the biggest increase since the December quarter 2008, and only
the second quarterly rise in that time.

Economists' forecasts had centred on a 0.6 per cent quarterly rise.

Reflecting the weakness of previous quarters, the annual PPI fell 0.1 in the year to
end-March, but this was much smaller than the 0.7 per cent declined expected by economists.

TD Securities senior strategist Annette Beacher said the result of the PPI does not
directly translate into the CPI report because it is a matter for individual businesses
when they pass on increased costs to consumers.

"Nevertheless, it does signal upstream pressure for inflation down the track, with
both imported and domestic inflation creeping higher in this (PPI) report," she said.

In an AAP survey of 13 economists conducted prior to the PPI release, forecasts centred
on a CPI rise of 0.8 per cent in the March quarter, lifting the annual rate to 2.8 per
cent, and up from 2.3 per cent in the year to end-December.

This would be towards the upper end of the RBA's two to three per cent inflation target band.

Forecasts for the more policy-sensitive underlying measure of inflation centre on a
0.7 per cent rise in the March quarter for an annual pace of 3.0 per cent, albeit down
from 3.4 in the year to December.

National Australia Bank senior economist David de Garis said an underlying inflation
outcome of this measure "may still be enough for another rate rise".

"A (March quarter) number that is materially higher than 0.5-0.6 per cent would be
grounds for the RBA to suspect that the low point for underlying inflation might not be
2.5 per cent as per their (February) forecast but 2.75 per cent," he said.

AAP cb/sb/ht/

KEYWORD: ECONOMY WRAP

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