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Inflation risks surfaceProducer prices
Business inflation: The Producer Price Index (PPI), or final stage prices, rose by 0.6 per cent in the December quarter to stand 1.7 per cent higher than a year ago. Of final stage prices, domestic goods prices rose by 0.5 per cent (1.9 per cent annual), while import goods prices rose by 0.6 per cent in the quarter (-0.5 per cent annual).
Inflation risks: Prices of intermediate goods rose by 1.2 per cent in the quarter to stand 3.1 per cent higher over the year – the strongest annual increase in four years. Preliminary stage materials rose by 1.2 per cent in the quarter to be up 3.0 per cent over the year – the strongest annual gain in 3½ years.
What does it all mean?
Business inflation is still contained, but there are some risks to watch. Output prices are up just 1.7 per cent over the year but early stage inputs are rising at an annual pace of near 3 per cent. In short, there is no room for complacency.
The NAB Business Survey released on Tuesday suggested that final product prices and purchase costs eased in December. Today’s producer prices report, however, indicates that prices for raw materials are rising.
Aussie companies that use commodities as inputs face higher costs. Crude oil prices rose by 17 per cent in the December quarter. Oil prices have since risen to 4-year highs as OPEC and Russia limit supply. And electricity prices rose by almost 11 per cent in 2017.
Manufacturing activity in Australia, as measured by the AiGroup Performance of Manufacturing Index, has expanded for sixteen consecutive months. The survey continues to indicate elevated pricing pressures due to higher energy costs. That said, manufacturing selling prices have moderated.
Retail deflation is evident in the prices received by producers for textile, leather, clothing and footwear manufacturing. This is consistent with consumer prices for women’s clothing falling to 28-year lows. Prices received by manufacturers for outputs of alumina, petrol and fuel refining, and zinc-related products all increased during the quarter.
Construction activity is buoyant, supported by a strong pipeline of infrastructure spending, home building and population growth. Interstate migration has propelled building construction costs higher in Brisbane. While house construction prices in Victoria have spiked due to nationleading inbound migration. 
What do the figures show?Producer prices
The Producer Price Index (PPI), or final stage prices, rose by 0.6 per cent in the December quarter to stand 1.7 per cent higher than a year ago. Of final stage prices, domestic goods prices rose by 0.5 per cent (1.9 per cent annual), while import goods prices rose by 0.6 per cent in the quarter (-0.5 per cent annual).
The final stage prices were driven “mainly due to rises in the prices received for Petroleum refining and petroleum fuel manufacturing (+11.9 per cent), Heavy and civil engineering construction (+0.7 per cent) and Building construction (+0.4 per cent).The result was “partly offset by falls in the prices received for Sugar and confectionery manufacturing (-3.9 per cent), Tobacco product manufacturing (-3.8 per cent) and Sheep, beef cattle and grain farming; and dairy cattle farming (-3.6 per cent).
Prices of intermediate goods rose by 1.2 per cent in the quarter to stand 3.1 per cent higher over the year – the strongest annual increase in four years.
Preliminary stage materials rose by 1.2 per cent in the quarter to be up 3.0 per cent over the year – the strongest annual gain in 3½ years.
Manufacturing input prices rose by 1.8 per cent in the December quarter after rising by 0.6 per cent in the September quarter. Output prices rose by 2.4 per cent in the December quarter after a 0.7 per cent fall in the September quarter. Output prices are up 3.5 per cent over the year with inputs up 3 per cent.
Inputs to house construction rose by 0.6 per cent in the December quarter with Sydney prices up the most (up 0.9 per cent). House construction costs were up by 2.7 per cent on the year, up from 2.4 per cent in the September quarter and up from 2 per cent in the June quarter. Brisbane prices rose most over the year, up by 3.7 per cent.
Prices of outputs of house construction rose by 0.4 per cent in the December quarter with the annual rate rising from 3.5 per cent to a 2-year high of 3.7 per cent.
House construction prices in Victoria were up by 6 per cent over the year, while apartment construction prices were up just 0.1 per cent. Overall building construction increased by 2.4 per cent.
What is the importance of the economic data?
The producer price figures are important in flagging price pressures at an early stage. If business costs are rising, the risk is that these will be passed on in terms of higher prices of final consumer goods. The Consumer Price Index is regarded as the key gauge of economy-wide inflation.
What are the implications for interest rates and investors?
Low business and consumer inflation means low interest rates.
Prices remain contained for now. But business inflation risks are re-surfacing at last. Rising raw material costs are pressuring producers. Prices received for commodity-related outputs are rising. Construction prices have been increasing. However, retail deflation is supressing prices received for goods due to global competition.
CommSec expects the cash rate may remain unchanged until December.
Originally published by Ryan Felsman, Senior Economist, CommSec