Profit margins are being squeezed as businesses are forced to absorb rising production costs in the face of weak consumer spending, economists say.
The Australian producer price index (PPI), a measure of prices “at the factory or farm gate”, rose 0.8 per cent in the June quarter, for an annual pace of 3.4 per cent at the final stage of production, the Australian Bureau of Statistics (ABS) reported on Monday.
The result was broadly in line with market forecasts and down from the 1.2 per cent rise in the March quarter.
Economists say the stronger Australian dollar, while a key influence on reducing prices in 17 of the 50 PPI categories, had not been enough to offset price inflation.
CommSec chief economist Craig James says Monday’s PPI suggests margin pressure is mounting for producers in the face of soft consumer spending.
Mr James says higher oil prices, building material costs and flood-affected crop price increases are behind the June quarter PPI increase.
“In the current environment with consumers closely watching their pennies, it’s more likely that businesses would seek to absorb higher costs rather than passing them through to final buyers,” Mr James said.
“So cost pressures would have greater relevance on profitability rather than inflation.”
The PPI is a key measure of inflation and can influence expectations for the more important consumer price index (CPI) due on Wednesday.
St George Bank chief economist Besa Deda said bottom line pressures on margins were building.
“Prices have increased a lot more than at the final point,” Ms Deda said.
“They (businesses) don’t appear to be fully passing them (price rises) on.”
Ms Deda said the PPI data didn’t change St George’s immediate outlook on interest rates, with Wednesday’s CPI report the more critical figure.
St George expects the Reserve Bank of Australia (RBA) to keep the cash rate on hold at 4.75 per cent for the rest of the year.
Ms Deda said the bank would reassess its outlook after the CPI.
Mr James said he expected the RBA to leave interest rates on hold for the next three to four months, given the softness of the economy.
“Consumers are saving, not spending,” he said.
“Businesses are also being cautious about employing and investing, especially outside the small mining sector (just 8 per cent of the economy).”
JP Morgan economist Ben Jarman said high oil prices were behind much of the gains in the PPI.
“If you look through the various stages of production, it’s pretty clear that prices for imported oil were up very significantly for the quarter,” Mr Jarman said.
In the June quarter, at the intermediate stage, the PPI was up 2.1 per cent, while at the preliminary stage it rose 2.8 per cent, the ABS said.
Over the year to June, at the intermediate stage, the PPI rose 5.6 per cent and at the preliminary stage it was up 6.8 per cent.
