The June Quarterly Producer Price Index is in. Producer inflation was lower than expected. That doesn’t mean prices have fallen, but that they grew at a slower rate. So here’s three cheers for making stuff.

Officially, producer prices rose 1.0% in the June quarter. Hmmm. Here’s 3.03 cheers for making stuff.

But it’s still a good result for the manufacturing sector. Commsec, for example, was predicting growth of 2.0% for the June quarter. The economy pulled a fast one and stopped buying.

The important thing is, if the producer price index is a prelude to a lower consumer inflation release on Wednesday, you might get that bounce in the ASX after all. The slightest prospect of an interest rate cut sent investors into bullish acrobatics yesterday. They did handstands until the close of trade. The All Ordinaries added 3%.

Note that those handstands are based partly on the assumption that the producer price index is linked to consumer prices. That the cost of production finds its way through to retail prices… so that consumers can enjoy the same inflation as manufacturers.

A lot of people are expecting consumer inflation to follow producer inflation’s lead.

That may or may not happen. But here’s an interesting point. This is the official release about the June 2008 producer price index. Take a glance at it. According to the ABS, the only items to actually fall in price were agricultural goods and electronic equipment. Everything else got more expensive. Especially fuel…refined petroleum rose in price by 8%.

If the fall in food prices filters through the economy, you get a bit of short term relief at the fruit and vegetable aisle later on in the year. And if the oil price continues dropping, there’s a good chance petrol might drop off too.

Prices, it seems, have risen enough for now. Inflation will be back, we suspect. And don’t rule out a surprise in the consumer price index release on Wednesday. But at this point, the economy could use a rest. Hopefully it’ll get one. If the CPI numbers come in at ankle-height too, shares will go up. That’s our prediction.

So that’s what shape the economy is this morning. There aren’t as many sharp corners on it as experts expected. And Energy prices haven’t moved a whole lot this week. Oil is still trading at about US$130. But there’s one other ‘E’ that we reckon is driving the sharemarket… Earnings results.

Al Robinson
The Daily Reckoning Australia

Source: June Producer Price Index Indicates Slower Inflation in Australia