Producer prices rose by more than expected last quarter as a slump in the dollar sent import costs surging, but signs of easing inflationary pressures at home kept the door open for more rate cuts.
A separate survey of businesses out today showed a surprising rebound in activity in December thanks to government pump-priming efforts, arguing for further fiscal help as well.
"It shows that fiscal stimulus proved effective in December and adds to the case for more, probably sooner rather than later,'' said Brian Redican, a senior economist at Macquarie. "And we're still on course for another rate cut next week.''
The Reserve Bank of Australia (RBA) holds its monthly policy meeting on Feb. 3 and investors are counting on a cut of at least 75 basis points in the 4.25% cash rate.
The central bank has already slashed rates by 3 percentage points since September in a desperate effort to cushion the country from a world recession.
"The RBA's very much focused on the deteriorating outlook for the global economy, and we continue to revise down our global growth forecasts,'' said Helen Kevans, an economist at JPMorgan. "So we'll probably see a 100 basis-point cut next week.''
Indeed, analysts argued that the jump in import prices seen last quarter augured ill for company profit margins and actually reinforced the case for more policy easing.
Overall, prices at the final stage of production (PPI) increased by 1.3% in the fourth quarter, well above forecasts of a 0.1% rise.
That was entirely driven by a 14.8% rise in import prices, which in turn reflected weakness in the Australian dollar which fell by 25% between July and December in trade weighted terms.
Domestic disinflation
In fact, domestic prices took a rare 0.5% dip in the fourth quarter, the first drop in a decade, with housing construction costs notably weak.
That added to expectations the government's index of consumer prices (CPI), due on Wednesday, would show a drop of around 0.4% in the fourth quarter, the largest since 1997.
Annual inflation is seen slowing to around 3.6%, from 5% in the third quarter, and could well re-enter the central bank's 2 to 3% target band this quarter.
Meanwhile, a monthly survey of over 400 firms from National Australia Bank showed that over $8 billion of one-off government payments led to a Christmas windfall for retailers.
As a result, the survey's main index of business conditions bounced by 11 points in December to -6 points, so recovering much of the steep 17 point-slide suffered over October and November.
Reuters
