Two leading investment banks say they believe we won’t have an election rate rise, even though one, Goldman Sachs JBWere, has lifted its headline September quarter Consumer Price Index estimate to a worrying 1%.

Despite this Goldmans still sees the Reserve Bank waiting until December to wish everyone Merry Christmas with a rate rise, while Merrill Lynch is not as bearish, predicting an underlying 0.7% CPI (0.8% for Goldmans) and a rate rise next February.

The forecasts came after further confirmation of the inflationary pressures building in the economy, despite the higher dollar, with yesterday’s release of the Producer Price Indexes for the September quarter. The ABS said that Australia’s producer price index at the final stage of production rose 1%, with an annual rise of 2.4% over the year to September.

Rents and real estate costs, construction, food, gas, water and electricity all rose much faster than expected and, according to figuring from Goldman Sachs, these alone could put the CPI up by around 0.44%.

The PPIs showed higher than forecast rises in domestic prices, offset by the impact of the dollar in trimming the cost of many imports.

But as we saw with the import costs price indexes last Friday, this affects the prices of tradeables which account for around 40% of the CPI, with non-tradeables accounting for the rest. There was enough evidence in the PPIs yesterday of price pressures building in both areas.

We had confirmation that the cost of food was rising much faster than many economists had thought. The drought is pushing up the cost of agricultural products across the board, especially in grain, sheep, beef and dairy items. And the impact of the higher costs expanded through the stages of production as each manufacturer or processor raised prices: up 7.7% at the preliminary stage, 10.5% at the intermediate stage and a whopping 15.4% higher at the final stage.

The figures also show that the impact of the drought on the cost of water. The ABS said the cost of electricity, gas and water rose 5.3% in the preliminary stage and was up 5.0% at the final stage.

The other worry is the rise in house construction and rent costs. Both were major influences in the June quarter CPI. They look to be big influences again. Real estate agent costs (rent mainly) rose by more than 12% at an annual rate, a big worry given the way that housing affordability is also being impacted by that rise in construction costs.

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Peter Fray
Peter Fray
Editor-in-chief of Crikey
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