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Australia expects inflation { April 28 2004 } Original Source Link: (May no longer be active)
http://www.theaustralian.news.com.au/common/story_page/0,5744,9411168%255E2702,00.htmlhttp://www.theaustralian.news.com.au/common/story_page/0,5744,9411168%255E2702,00.html
Rate rise fears as RBA expects inflation to climb
By David Uren, Economics correspondent
April 28, 2004
RISING domestic prices are emerging as a major concern of the Reserve Bank, which meets next Tuesday to consider the future direction of interest rates.
Producer prices - essentially the wholesale costs charged by business - have increased by a modest 0.9 per cent over the past year, according to a survey released yesterday by the Australian Bureau of Statistics.
However this was the combined result of domestic prices rising by 4.1 per cent and imported goods falling in price by 13.6 per cent.
The prices of imported goods are falling partly because the Australian dollar has risen against the currencies of its trading partners.
They are also reflecting the growing efficiency of global manufacturing industry, particularly China's.
The rise in domestic prices is led by the construction industry, which has lifted its costs by 8.2 per cent over the past year, and also services such as real estate agents, whose prices are up 13.8 per cent, and legal and accounting services, whose prices have risen by 7.8 per cent.
The consumer price index, which is to be released today, is expected to show the overall rate of inflation in Australia in March dropped below 2 per cent for the first time since December 1999.
However, business economists said this would be a statistical anomaly because a price jump in March last year has now dropped out of the calculations.
Westpac senior economist Justin Smirk said that over the past six months inflation had been rising at a rate of 2.6 per cent.
HSBC chief economist John Edwards said the level of domestic price increases contained in the producer price survey supported the Reserve Bank's case that Australia faced a medium-term inflation risk.
"The Reserve Bank believes that domestic prices will continue to move up and that when the impact of the appreciation of the Australian dollar washes out, we will see the headline rate of inflation moving closer to the rate at which domestic prices are increasing," Dr Edwards said.
Dr Edwards said that if the Reserve Bank did not increase interest rates next week, it would be hard for it to do so at the next meeting in June, as that would be perceived as a criticism of the May budget.
ComSec chief economist Craig James said most of the benefits of cheaper imports had not been passed through to consumers but had instead been taken by business in the form of higher profits.
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