Inflation winners & losers

Producer prices; Export & import prices

What happened? The “final demand” component of producer prices (business inflation) rose by 0.7 per in the June quarter to be up 2.2 per cent on a year ago – the strongest annual growth in almost seven years.

Other economic data: Import prices rose by 1.9 per cent in the June quarter but were down by 2.5 per cent on a year ago. Export prices rose by 13.2 cent in the quarter to be up by 26.0 per cent on the year. The terms of trade probably rose by around 8-10 per cent in the June quarter and most likely to record highs.

Implications: Many of our exporters are experiencing tremendous operating conditions, characterised by high demand and double-digit price increases. The weaker Aussie dollar is also supportive. But construction companies, manufacturers and some primary producers are being buffeted by higher raw material costs.

The data on producer prices shows price pressures being faced by Australian businesses. The terms of trade data is useful in assessing the outlook for the Australian dollar and therefore trade-exposed businesses.

What does it mean?

• In the current environment there is a lot of fear about rising prices. The concern is if inflation becomes elevated then central banks will need to wind back monetary stimulus. That may be over-simplifying things. But prices are indeed rising for a raft of items. Some goods – like cars – are in short supply because Covid-19 lockdowns have served to reduce car production. And a shortage of semi-conductors is exacerbating production difficulties. At the same time, cars are in demand due to Covid-19 worries about public transport use.

• A raft of commodity and finished good prices are also lifting. Amongst the items are iron ore, oil, wood, fertilizers, metals like copper, steel, natural gas, coal, meat, plastics, rubber and chemicals. But it’s not all one-way traffic. Mobile phone prices have fallen with the Bureau of Statistics citing the discounting of older models. The long-term trend of cheaper medicines continues, travel goods are (understandably) cheaper with clothing and textiles.

• As is always the case when prices are moving, there are winners and losers. The construction sector is experiencing higher costs together with rural producers and manufacturers. But both higher demand and higher prices are serving to benefit car dealers, mining and energy producers and accommodation providers.

• In a number of cases, Covid-19 can be cited for driving prices higher. But higher meat prices reflect herd rebuilding, while fruit and vegetable prices partly reflect wetter conditions across growing districts and a shortage of pickers due to border closures.

• At a macro level, the debate focuses on whether generally higher prices is a temporary or transitory phenomenon or whether prices will linger at higher levels. Central banks argue that many of the factors driving prices higher are temporary – related to the effects of Covid-19. The rationale is that higher vaccination rates will allow economies to re-open, production will lift and that supply will narrow the gap with elevated demand.

• In Australia, that is our contention also – that inflation will prove temporary. CBA Group economists expect that the headline rate of inflation will end 2021 at 1.9 per cent, down from 3.8 per cent currently. And underlying inflation (trimmed mean) will rise only slowly over time, reaching 2 per cent in a year’s time from 1.6 per cent currently.

• Higher relative prices for exports compared with imports is also serving to lift income levels in Australia. The terms of trade (export prices /import prices) may have risen 8-10 per cent in the June quarter to record highs.

• Investors need to track the shifts in prices, determine how long prices may diverge from longer-term averages, determine how companies are responding and weigh the impact on revenues, costs and bottom-line profits.

What do you need to know?

Producer prices – June quarter

• The “final demand” component of producer prices (business inflation) rose 0.7 per in the June quarter to be up 2.2 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:

• “Heavy and civil engineering construction (+1.8 per cent), due to increases in wages and materials driven by public sector investment in transport infrastructure projects.

• Output of building construction (+1.8 per cent), due to house builders capitalising on improved buyer interest by increasing base prices and reducing bonus offers to pass through material cost increases.

• Petroleum refining and petroleum fuel manufacturing (+12.1 per cent), due to increases in global crude oil prices, influenced by increasing demand and ongoing OPEC+ supply cuts.

• Offsetting the rise were price falls in:

• “Electricity supply, gas supply; and water supply, sewerage and drainage services (-2.5 per cent), due to falls in contractual pricing on electricity supply.

• Commercial fishing (-12.7 per cent), due to increased seasonal supply of king prawns.”

• “The continuation of industry recovery is reflected in the annual results, the rise of 2.2 per cent to June 2021 is the strongest annual increase since September 2014.”

• Prices for accommodation providers rose 4 per cent in the quarter to be up 13.9 per cent on the year.

International trade prices – June quarter

• Import prices rose by 1.9 per cent in the June quarter but were down by 2.5 per cent on a year ago. Export prices rose by 13.2 cent in the quarter to be up by 26.0 per cent on the year. The terms of trade probably rose by around 8-10 per cent in the June quarter to record highs.

• Iron ore prices rose 18.5 per cent in the June quarter, coal prices lifted 15.6 per cent, natural gas prices rose 14.6 per cent, oil products rose 12 per cent and meat prices rose by 10.1 per cent.

Published by Craig James, Chief Economist, CommSec