Australian producer prices at the final stage of production increased 0.6%q/q (JPMorgan 0.9%, consensus 1.1%) in 4Q
after a strong 1.1% rise in 3Q. The rise in producer prices again was primarily owing to higher building construction
costs (+1.4%), which will likely be reflected in the house purchase component of the CPI (due on Wednesday), accounting
for a significant 8% of the CPI basket. This increase was, however, offset by significant falls in prices of agriculture
(-19.4%) and electronic equipment manufacturing (-7.2%). At the intermediate and preliminary stages of production,
producer prices increased 1.1%q/q and 1.5%, respectively.
The only component of the 4Q PPI print to post a decline was import prices at the final stage of production (-1.4%q/q),
reflective of the strong AUD, which was up nearly 5% against the US dollar over the quarter. Producers are not likely to
have passed on the fall in input costs to consumers, however, instead choosing to maintain profit margins over the
course of the quarter. Import prices at the intermediate and preliminary stages of production were up 0.6%q/q and 2.2%,
respectively. Meanwhile, domestic prices again headed higher across the board, increasing at each stage of production:
final (+1.9%), intermediate (+1.1%), and preliminary (+1.4%) over the quarter.
Market focus now turns to the 4Q CPI report on Wednesday. While the 4Q PPI series fell on the downside of market
expectations, in our view, it will have few implications for the incoming CPI data as producers likely opted to expand
their margins, rather than lower prices for consumers. JPMorgan forecasts headline and core CPI at 1.0%q/q (+3.0%oya)
and 0.9%q/q (+3.3%oya), respectively - both measures look set to rise above the RBA’s 2-3%oya target range. JPMorgan
expects that a reading of 0.9%q/q or above on the core measure of inflation will be enough for the RBA to hike interest
rates by 25bp in February. A reading of 0.8%q/q on the core would make the February rate decision a closer call
although, with inflation set to remain above the RBA’s target range in coming quarters, an imminent rate hike appears
warranted.
Producer prices rose 0.6%q/q owing mainly due to price increases in building construction (+1.4%) and petroleum
refining (+12.8%).
From a year ago, producer prices were up 2.8%, compared to 2.4% in the prior three months.
Producers’ import prices rose at the preliminary (+2.2%) and intermediate (+0.6%) stages of production, although fell
at the final stage (-1.4%).
Domestic prices rose at all stages of production: final (+0.9%), intermediate (+1.1%), and preliminary (+1.4%).
ends