PPI fall 'to ease inflationary pressure'

An unexpected drop in the producer price index will put downward pressure on inflation, economists say.

Australia's producer price index (PPI) at the final stage of production fell 0.4 per cent in the March quarter, with an annual rise of 4.0 per cent, the Australian Bureau of Statistics (ABS) said Monday.

This compares with a 1.3 per cent rise in the December quarter.

Economists had expected the March quarter PPI to rise 0.6 per cent for an annual rise of 4.9 per cent.

ANZ Economist Riki Polygenis said the drop will put downward pressure on the Consumer Price Index, a key inflation indicator.

The ABS will publish the CPI on Thursday.

"The fall in the PPI will put downward pressure on inflation," she said.

"While headline inflation will be positive in the March quarter, following a negative in the December quarter, it will be more moderate than it usually is in the March quarter.

"The March quarter is usually pushed up by seasonal price increases like education, health and utilities."

In the March quarter, at the intermediate stage, the PPI fell 3.2 per cent, while at the preliminary stage it fell 4.6 per cent.

Over the year to March, at the intermediate stage the PPI rose 3.9 per cent and at the preliminary stage it rose 4.3 per cent.

"The Reserve Bank will be more comfortable easing inflationary pressures," Ms Polygenis said.

"I don't think there will be many monetary implications from this."

Forecast economist Michael Turner said drop in the March quarter PPI doesn't add or subtract from the case for further quantitative easing by the Reserve Bank when it meets in May.

"To be honest, inflation isn't high on the agenda for the RBA," he said.

"But this is one less thing they have to worry about.

"The market wasn't expecting it to fall.

JP Morgan economist Helen Kevans said while prices for imports rose 3.9 per cent at the final stage in the March quarter, import prices slumped at the intermediate and preliminary stages.

"At the intermediate stage, prices were down 3.2% over the quarter," Ms Kevans said.

"Domestically produced items fell 2.3 per cent, dragged lower by significant falls for basic non-ferrous metal manufacturing (20.8 per cent) and metal ore mining (13.3 per cent).

"The 8.3 per cent decline in the price of imported items stemmed from large falls in oil and gas extraction (39.3 per cent) and dairy product manufacturing (35.7 per cent).

Ms Kevans said the market's gaze would turn to the release of the consumer price index report for the first quarter of 2009 on Wednesday.

However, inflation had become less of a concern for the Reserve Bank of Australia (RBA) as they attempt to stimulate a flagging economy, Ms Kevans said.

"RBA officials won't be sitting on the edge of their seats (like they once did) in anticipation of this week's inflation data," she said.

"Inflation issues have moved to the back burner.

"We expect further modest rate cuts from the RBA, particularly given that it will be difficult for RBA officials to sit on their hands as the unemployment rate rises sharply in the months ahead."