Monday, 26 October 2009

No reason for inflation panic

It’s not the real thing as far as the Reserve Bank and financial markets are concerned but nevertheless the producer price index figures out from the Australian Bureau of Statistics this morning are a clear pointer that inflationary pressures from a recovering Australian economy have not yet begun.

Final producer prices increased by just 0.1% in the September quarter to give an annual rise of 0.2% through the year. The index for intermediate and primary state commodities fell by 0.6% and 0.5% respectively in the September quarter for annual price falls of 4.9% and 7.5% throughout the year.
With low numbers like these for producer prices it would be surprising if the consumer price index figures due out on Wednesday told a different inflationary story. The news agency AAP reports that its survey of 12 business economists suggests that the CPI figure will show an increase of 0.9% in the September quarter to give an annual rate of 1.2%. If the figure does turn out to be that high then the market is probably correct in thinking that a 0.25% increase in interest rates is likely to be made by the Reserve Bank on Melbourne Cup Day. Such a rise is the most probably outcome on the CrikeyNovember Interest Rate Indicator.

For my part I’m inclined not to go along with the herd and will risk a little of my own hard earned and back the no change option in the expectation that the CPI number will be close to the producer figure and that the Reserve Bank Board will thus allow itself to be influenced by the indications that the world economy has a long way to go before fully recovering and that rises in Australian unemployment, especially in the manufacturing industries, will do the job of dampening consumer enthusiasm.
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