Inflationary price pressures continue to impact the broader economy. While Australia’s producer price index (PPI) for the June quarter has come in a bit lower than the market had thought, there are still signs of inflation price pressures hitting business at all levels of the economy, thanks to the impact of higher oil prices, but also higher iron and steel manufacturing costs.

The PPI at the final stage of production rose 1.0% in the June quarter, with an annual rise 4.7%, according to figures from the Australian Bureau of Statistics. This compares with a 1.9% rise in the March quarter which was much higher than thought and which produced an 4.8% PPI of 4.8%. Economists had expected a quarterly rise of around 1.6%, for an annual rate of 5.3%. So a slow down in the quarter, but the annual figure still remains at a high level.

The PPI, along with the international export and import price indices, released last Friday (and which showed how the high value of the Australian dollar was cushioning us from the real impact of the surge in oil and petrol prices), are the last figures to be released before the CPI for the June quarter and 2007-08, which is out Wednesday.

The ABS said that the intermediate stage PPI rose 2.7% in the quarter (7.1%) over the year, while at the preliminary stage it rose 3.5% (8.5% over the year to June). That rise in the preliminary stage PPI of 3.5% was the highest since the ABS started series back in 1998 and reflected the impact of higher oil and fuel prices in particular, and rising iron and steel costs. The latest rise contrasts with a 9.2% rise in the year to June in the US (1.1% in the month of June alone, more than ours for the quarter!) and a 10% rise in final producer prices in the UK in the same period.

In a brief analysis, the ABS said the rise was “mainly due to price increases in building construction (+1.6%), petroleum refining (+8.2%), meat and meat product manufacturing (+3.1%), and non-building construction (+2.0%) and was partially offset by price falls in other agriculture (-7.3%) and electronic equipment manufacturing (-6.4%).”

Putting the higher costs for petrol refining to one side (which were an understandable rise in costs given the surge in oil prices over the quarter and the year) there are signs of inflation pressures moving into the broader economy. Oil was the single largest cost pressure through all three stages, followed by a 10% rise in iron and steel manufacturing.

The price pressures in building and non-building construction reflect the impact of rising demand from the resources industry for resources and labour, but also the impact of higher diesel fuel costs on cartage of steel, cement and other products by manufacturers. The price fall in agricultural products reflects the improved outlook for the sector with reasonable rains and falling grain and fruit and vegetable costs in the last couple of months (Woolworths remarked on the drop in fruit and vegetable costs in its final quarter).

Higher iron and steel costs at the preliminary and intermediate stage are making their way into the cost of building quality steel mesh, beams and other structural products.

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Peter Fray
Peter Fray
Editor-in-chief of Crikey
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