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Inflation data points to interest rates being kept on hold

Interest rates may stay on hold for longer than expected after official data showed a measure of inflation easing in the September quarter.

Producer prices - the prices of goods and services at the factory or farm gate - increased at their slowest quarterly pace since December 2010, Australian Bureau of Statistics (ABS) data showed today.

The PPI at the final stage of production rose 0.6 per cent in the September quarter for an annual rise of 2.7%.

That compared with a 0.8% rise in the June quarter, and was below the median market forecast of 0.8% for the September quarter.

The PPI is a measure of inflation and can influence expectations for the more closely watched consumer price index (CPI).

HSBC chief economist Paul Bloxham says the PPI data suggests Wednesday's CPI may come in lower than market forecasts.

'It certainly shows signs that inflationary pressures have eased a bit in the Australian economy,' Mr Bloxham said.

'I think the Reserve bank has become less concerned about inflationary pressures building in the Australian economy but at this stage we think it's still likely to keep them on hold rather them cut interest rates.'

The RBA uses the CPI as a key gauge of inflation in the economy and a guide to setting the cash rate, which has remained at 4.75% since November last year.

The RBA board next meets on November 1 to decide the direction of interest rates.

Mr Bloxham said the PPI data added to the case for the central bank to keep rates on hold for longer than what the market has been expecting.

Macquarie Group senior economist Brian Redican said the September quarter PPI was better than expected.

'The main thing pushing up prices in the third quarter was those higher utility charges, in particular electricity prices - and as we all know that will be reflected in the consumer price index numbers on Wednesday,' he said.

'Probably the better surprise was the decline in building construction costs, that's a big chunk of overall producer prices and that actually fell in the third quarter.

'Moving into the CPI, there's a slight downside risk but I don't think it will be sufficient for anyone to change their forecasts on the basis of these numbers.'

JP Morgan economist Ben Jarman said the data was a little softer than expected but did not provide a clear picture on where the CPI would be on Wednesday.

'With the inflation and disinflation forces landing in the expected places, today's data will mean little for the RBA's near-term deliberations,' Mr Jarman said.

JP Morgan is forecasting September quarter headline inflation at 0.6% and underlying inflation, which excludes the sharp movements in some categories, to rise also by 0.6%.

Mr Jarman said neither of these figures would leave the RBA board feeling that the inflation battle had been won.

'From there, it would take a large negative shock to global growth for officials to consider easing policy (cutting rates),' he said.

Reproduced in full with permission. www.news.com.au Inflation data points to interest rates being kept on hold. 25 October 2011.