Aus PPI up 1.0% but CPI the focus

Australian producer prices (PPI) increased by 1.0% in 2Q07, exceeding forecasts of a 0.8% rise driven by higher petrol and construction costs. However, growth for the year slowed to 2.3%, significantly lower than the peak of 4.5% in 2Q06 and is the slowest pace since mid-2004.

Attention now turns to the more important Consumer Prices (CPI) to be released on Wednesday. Traditionally the PPI does not have a close correlation to the CPI however over recent quarters they have been more closely corrrelated.

Economists are forecasting a 1.0% rise in 2Q07 CPI, driven by the higher cost of petrol, food, rents and health care. Still, that would see annual inflation slowing to just 1.9% from 2.4% in 1Q07. The RBA focuses on underlying inflation, which is expected to rise 0.7% in 2Q07 which would lower annual underlying inflation to 2.5%, from 2.7% in 1Q07 - bang in the middle of the RBA's 2 to 3% target range.

For the RBA to move on rates in August Wednesday's CPI reading would have to significantly exceed forecasts. I maintain the view that we are unlikely to see another interest rate rise from the RBA this year.