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Tuesday April 22, 2008 - 17:51:20 GMT
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AU Preview: Australian CPI Inflation Likely Rose in First Quarter

12:20 04/22 (CEP News) – Australia’s Consumer Price Index measure of inflation is widely expected to have accelerated in the first quarter of 2008, but many economists say the rise will do little to spur central bank action.

The headline CPI figure is expected to have grown 1.1% in the first quarter, following a previous 0.9% gain in the previous quarter. On an annual basis, CPI is expected to have risen 4.0% following the 3.0% gain recorded in the fourth quarter of 2007.

Economists say markets will be focused on the RBA trimmed mean and weighted median CPI figures, which exclude the most volatile figures from the quarter. RBA trimmed mean CPI is forecast to have risen 0.9% in the quarter and 3.8% on an annual basis, while RBA weighted median CPI likely grew 0.9% on the quarter and 4.0% on the year.

"For the first time in about five years, markets will be reasonably relaxed with the announcement,” noted Bill Evans, managing director of Economics and Research at Westpac. “The Governor of the Reserve Bank has made it very clear in a number of recent statements and speeches that he is expecting the annual rate of inflation to climb to 4% for the year to the March quarter.”

He noted that would require a 1.1% read on headline inflation for the quarter and 1% for the underlying measure.

“Our view is that the RBA will resist the need to cut rates until it sees a second year of slowing demand growth (2% in 2009) and the associated easing inflationary pressures,” he wrote. “However with the unemployment rate still below 5% by mid 2009 we think the Bank will struggle with the case for rate cuts until well into 2009H2.”

Apeksha Sumaria from ING agreed, noting that while the CPI releases have acted as a precursor to forthcoming policy action from the RBA in the past three quarters, that trend is likely to change.

The CPI figures will follow an unexpectedly sharp rise in the March Producer Price Index, released at the start of the week, which many say has added a degree of upside risk to the CPI inflation data.

First quarter PPI rose 1.9% on a quarterly basis – its fastest pace since data collection began in 1983, statistics from the Australian Bureau of Statistics showed. Producer prices were 4.8% higher in the first quarter compared to a year earlier – the highest annual level since the fourth quarter of 2000.

"Although the PPI data for Q1 nearly doubled expectations and raises upside risk to Q1 CPI, the RBA is not expected to tighten further,” noted Jennifer Lee, a senior economist at BMO Capital Markets. “After raising rates 25 bps to a 14-year high of 7.25% in March, the statement that followed hinted that the move would be the last of the series of rate hikes.”

Amanda Tan, a Treasury economist from St. George Bank, noted that a third of the increase in Q1 PPI was the result of building construction, which is not included in the CPI figures. “Accordingly, the upside risk to (Q1) CPI outcome from (Monday’s) PPI result is modest.”

Most expect the RBA to hold rates at its next policy meeting on May 6, but markets are pricing in a 10% chance of a hike following an unexpected rise in March producer prices. The cash target rate is currently at 7.25%.

However, markets are currently pricing in a 73% chance of a rate cut by the end of the year, which ANZ economist Riki Polygenis called “overly optimistic” given that inflation is unlikely to return to the bank’s 2-3% target band until mid-2009.

“This sentiment has been reinforced by recent developments on commodity markets, with recent surges in crude oil and global agricultural commodity prices highlighting the abundance of near-term upside risks to inflation, notwithstanding the downside risks further out stemming from slower domestic demand growth," Polygenis noted.

By Stephen Huebl, [email protected], edited by Cristina Markham, [email protected]

(END) ©CEP Newswires - ©CEP News Ltd. 2008. All Rights Reserved.

Related recent stories:
(16:53 04/21) The Day Ahead Japan & Australia: Japan Supermarket Sales, Australian Q1 CPI
(12:50 04/21) Central Bank Watch: Focus on BOC Rate Decision; Fed Speakers Say Mon Pol Has Limits (Update)
(10:53 04/21) Australian Producer Prices Rise at Unprecedented Pace, Up 1.9% in Q1


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