The โ€œfinal demandโ€ component of producer prices (business inflation) rose by 1.4 per in the June quarter to be up 5.6 per cent on a year ago, the strongest annual growth rate in 13ยฝ years (since December 2008).

Private sector credit (broadly, outstanding loans) rose by 0.9 per cent in June to be up 9.1 per cent on the year.

Business credit rose 13.2 per cent in the year to June – the strongest annual growth rate in 13ยฝ years.

What does it all mean?

A โ€œtrifectaโ€ of Aussie inflation reports for the June quarter were released this week, commencing with consumer prices on Wednesday and international trade prices yesterday. And today it was the turn of producer prices or business inflation to take centre stage on the economic data docket.

 

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And the data showed that business prices are soaring across a broad range of categories. In some cases, prices are lifting at the fastest pace in decades and some even since statistics were first compiled.

The key elements in all reports were Covid-driven supply-chain disruptions, soaring construction costs and higher fuel and energy prices. Simply, the supply of goods โ€“ locally and across the globe โ€“ is not keeping up with demand, resulting in sharply higher prices for literally everything. Australia has not been an exception to this global trend. Inflation has spiked higher, causing the Reserve Bank to lift interest rates.

While the Reserve Bank canโ€™t do anything to address rising petrol prices or supply-chain issues, it can seek to restrain demand (spending) to meet the restricted supply levels. In line with other central banks, the Reserve Bank will continue to quickly lift rates to a more โ€˜neutralโ€™ level near 2.5 per cent. While there is a risk in lifting rates too quickly, there are greater medium-term risks in failing to get on top of soaring inflation rates.

Commonwealth Bank (CBA) Group economists expect the cash rate to lift by 50 basis points (bp) next week and again at the September 6 Reserve Bank Board meeting. A further 25bp lift in rates is expected in November.

Inflation is not expected to peak in annual terms until the December quarter.

What do you need to know?
Producer prices โ€“ June quarter

The โ€œfinal demandโ€ component of producer prices (business inflation) rose by 1.4 per in the June quarter to be up 5.6 per cent on a year ago.

According to the Australian Bureau of Statistics (ABS), the main contributors to the quarterly growth in final demand were:

โ€œOutput of building construction (+3.9 per cent), driven by continuing supply constraints for timber and metals, high freight costs and labour shortages.

Petroleum refining and petroleum fuel manufacturing (+31.5 per cent) due to a decrease in global crude oil supplies and increased demand in response to easing COVID19 restrictions.

Heavy and civil engineering construction (+2.8 per cent), due to increases in diesel and material prices
coupled with skilled trade shortages and high freight costs.โ€ Services

Prices lifted strongly across service sectors in the June quarter and in the year to June. Amongst the
annual increases recorded: Laundry and dry-cleaning services prices rose 8.7 per cent; Hairdressing and beauty services rose 4.6 per cent; Engineering design and consulting services prices rose 7.8 per cent; Accounting services prices rose 3.5 per cent; Non-residential property operators rose 4.6 per cent; Real estate services prices rose 13.5 per cent; Passenger car rental and hiring prices rose 14.4 per cent; Road freight transport prices rose 8.3 per cent; Postal and courier pick-up and delivery services rose 8.1 per cent; Accommodation services prices rose 16.0 per cent; Cafes, restaurants, and takeaway food services prices rose 6.0 per cent.

Manufacturing

Input prices to manufacturing rose 3.1 per cent over the quarter and rose 17.7 per cent over the past twelve months โ€“ just off the fastest pace in 42 years.

Output prices of the manufacturing industries rose 5.1 per cent over the quarter and 18.1 per cent over the past twelve months โ€“ the largest annual growth in 42 years.

Inputs into house construction

Input prices to the house construction industry rose 4.3 per cent in the quarter and 17.3 per cent over the year โ€“ the biggest annual increase in 42 years.

The ABS noted: โ€œInput prices to house construction rose 4.3 per cent this quarter, primarily due to timber and other metals, driven by supply shortages and strong demand. Suppliers are passing through more of the price increases as ongoing supply constraints of building materials is unable to meet demand across house construction.โ€

โ€œThe main contributors were:

Timber, board and joinery (+7.0%), driven by timber windows (+14.7%), due to ongoing supply constraints for timber, and strong freight prices.

Other metal products (+3.9%), driven by aluminium windows and doors (+4.9%), due to increased raw material prices, tight supply and strong global demand.

Other materials (+2.8%), driven by insulation (+8.4%), due to price rises for insulation materials, global production disruptions and strong freight prices.โ€

Over the past twelve months, Input prices to house construction rose 17.3 per cent, due to; Timber, board and joinery (+24.2 per cent) and Other metal products (+18.4 per cent).โ€

Construction

Building construction prices rose 3.8 per cent in the quarter and 12.2 per cent over the past twelve months. This is the largest annual increase since the series began in 1996.

The ABS noted: โ€œSupply chain instability and high shipping costs, coupled with ongoing skilled labour shortages is continuing to drive up construction costs this quarter. Strong levels of activity across all construction sectors has enabled builders to pass through cost increases to buyers.โ€

House construction prices rose 6.0 per cent (19.8 per cent annual) with โ€œother residentialโ€ prices up 2.4 per cent (7.7 per cent annual).

โ€œIncreases in prices of building materials were driven by rising freight costs while tightened supply for timber and metals is causing project delays. Shortages for skilled trades is placing further pressure on labour costs. Victoria recorded its strongest rise since the start of the series as builders continue to reduce bonus offers and raise base prices.โ€

In terms of other residential prices: โ€œOther residential construction prices increased across all states, with strong increases seen in Tasmania, Northern Territory and New South Wales. Ongoing metal, timber and fuel price increases, coupled with the tightened availability of skilled trades is placing further pressure on input costs, driving the increases this quarter.โ€

Non-residential construction prices rose 2.7 per cent in the quarter (8.8 per cent annual). โ€œPrice rises are being driven by increased material costs for steel, concrete and reinforcement while rising prices for diesel fuel has increased operating and freight costs. Strong activity in the residential, civil infrastructure and mining sectors has placed additional pressure on wage costs with increased demand for skilled trades.โ€

Heavy and civil engineering construction prices rose 2.8 per cent in the quarter (9.0 per cent annual). โ€œOther and civil engineering construction prices rose due to increased costs for crude oil, freight and increasing costs for raw materials.

Road and bridge construction prices rose due to increased costs for steel and crude oil driven by global production disruptions, supply chain volatility and strong international and domestic demand.โ€

Private sector credit โ€“ June 2022

Private sector credit rose 0.9 per cent in June to be up 9.1 per cent over the year.

Housing credit rose 0.6 per cent in June to be up 7.8 per cent on the year.

Personal credit fell 0.4 per cent in June to be down 2.7 per cent on the year.

Business credit rose 1.5 per cent in June to be up 13.2 per cent on the year โ€“ the fastest annual pace since October 2008. APRA data on deposits and loans โ€“ June 2022

Household deposits at banks rose by $2.9 billion or 0.2 per cent in June to $1275.2 billion and were up 12.8 per cent over the year.

Since the pandemic began in February 2020, Aussie households have boosted deposits at banks by $286 billion or almost 30 per cent.

Originally published by Craig James, Chief Economist, CommSec