It’s an important week for the macro-economy, with the release today of the ABS September quarter producer price index (PPI) and the ABS September quarter consumer price index (CPI) on Wednesday. Today’s PPI data shows that final stage PPI rose by 1.0% for the September-quarter, up 4.0% through the year.
This rate, although down considerably from the 1.6% in the second quarter (4.5% year to June), is still uncomfortably high and is more likely to encourage another rate hike before the year is out.
The PPI gives analysts a hint of what to expect in Wednesday’s CPI figures. The shockingly high June quarter PPI data was followed with CPI data showing an increase of 4%, although core inflation measures generally put inflation around 2.8%.
It is therefore expected that today’s slightly lower PPI data may mean Wednesday’s CPI data will not be as scary as 4%. However, it is crucial to realise that headline CPI rates don’t generally factor in the RBA Board’s interest rate decision making – it is the core rate that is deemed more accurate.
The core CPI figures, either the RBA’s “Trimmed Mean’ or “Weighted Median”, exclude the more volatile items in the CPI basket of goods, like food and fuel. While the PPI has fallen, it is more than likely due to the fall is these volatile items rather than across the board. Indeed, a barrel of oil has now dropped to around $US57 compared to over $US78 during late July.
If you, gentle readers, will cast your mind back three months, when the second-quarter CPI figures were released, you’ll remember a fair amount of unnecessary hullabaloo about headline/core rates of inflation. TD Securities resident guru Stephen Koukoulas carried out an impressive forensic economic analysis to come up a measure of CPI that disregarded the China-effect, the fruit-effect and the petrol-effect. The results were scary. Excluding these effects, Koukoulas found inflation ran at 3.5% in the year to the June quarter.
“This is probably a fair measure of the current inflation problem in Australia. It is why the RBA will hike interest rates for a seventh time on 2 August, it is why there is a strong likelihood of an eighth rise before the end of 2006”.
Despite this slight fall in the PPI, Henry would be surprised if the core rate of inflation, however it is measured, would have actually fallen back at all during the third quarter. We’ll wait for Wednesday to see.
Read more at Henry Thornton.