Producer prices rose last quarter for the first time this year as the cost of utilities rose, but the increase was modest and should take pressure off the Reserve Bank for an aggressive rate rise.
The smaller-than-expected result pointed to a moderate reading on consumer prices, due out on Wednesday, which would lessen the chances of the RBA pushing through a steep 50-basis-points rate rise next week.
"We don't really see the need to go urgently or more aggressively in November," said Macquarie Bank senior economist Brian Redican, who is predicting a 25 basis point rate rise. "We have seen quite modest wages growth and the PPI shows some of those upstream price pressures are also starting to alleviate."
This month, the central bank became the first in the Group of 20 industrialised nations to raise rates since the global downturn began to ease, as Australia's economy pulled out of a milder-than-expected downturn.
The dollar briefly dipped to $US0.9192 after the producer price data was released, down from $US0.9215 before the figures came out, but was recently trading at $US0.9203.
Implied cash rates, based on money market and swap rates, are fully pricing in a 25-basis-points hike and factoring in about a 30 per cent chance of a 50-basis-points rise on November 3.
Prices at the final stage of production (PPI) rose by 0.1 per cent in the third quarter, below forecasts of a 0.3 percent rise. It was the first increase after two negative quarters.
For the year, producer price inflation stood at 0.2 per cent, down from an annual pace of 2.1 per cent in the previous quarter. In the quarter, prices were driven by a 12.1 percent jump in utilities charges, offset by falls in equipment manufacturing costs and a 5.1 per cent slide in imported goods prices.
"It looks to be good news on the inflation front that upstream price pressures still seem to be pretty well contained and, if anything, slowing," said Commonwealth Bank chief economist Michael Blythe.
Median forecasts are that headline CPI rose 0.6 per cent in the quarter, but analysts say a rise in government taxes, higher utility charges and higher public transport fares last quarter would keep alive chances for an upside surprise.
The underlying CPI is forecast to be up by 0.8 per cent in the third quarter, and 3.5 per cent from a year earlier.
That would still keep the rate above the central bank's target range of 2-3 per cent range, and support Governor Glenn Stevens' resolve to return borrowing costs to more normal levels from emergency lows, to head off future inflation.
The strong Aussie, which scaled a 14-month high of $US0.9330 last week, is expected to help keep down import prices, moderating the pick-up in overall inflation in coming quarters.
JP Morgan economist Helen Kevans said the Reserve Bank wanted to maintain the impression of an "orderly exit" from low rates, which meant a 50-basis-points rate rise on November 3 was unlikely. "It would take a substantial upside surprise on Wednesday's CPI to increase the chances of a 50 basis point move," she said.