The producer price index (PPI) rose 0.4% in the December quarter for an annual rise of 2.9%. Over the last 3 years, the annual average increase in the PPI has been 1.3% with swings in the Australian dollar a major variable in driving shorter term results.
While there is only a loose correlation between changes in the PPI and the CPI, they tend to turn and exhibit extreme movements at more or less the same time. Importantly, the RBA does often note the PPI when looking at broader inflation and monetary policy risks and today’s data suggest that upside inflation risks are hard to find. If anything, inflation pressures seem to be easing from an already low base, a scenario that fits with the all but certain interest rate cut on 7 February.
All eyes will be on the CPI on Wednesday. There remains a strong risk that the headline CPI will be negative and the underlying readings also very low. If this comes to pass and the pressure on bank funding costs remains in the forefront on the RBA thinking, a 50 basis point cut is possible.