The PPI measures upstream inflationary pressures (predominantly for goods) faced by producers in the commodities,intermediate and finished product stages. The rise in the PPI over QIV was softer than we were expecting, given the upsidesurprise from the CPI release last week. However, given the PPI’s narrow focus to upstream producer prices we remain ofthe view that upside inflation risks are appearing. For the RBA, the CPI trajectory is a better indication of inflationarypressures given the services component in the CPI data (around 40% of the basket). In our view, structural price pressureswill keep domestic inflation elevated at a time when imported prices are rising (given the depreciation in the Aussie dollar).This story lies behind our view of upside inflation risks in 2014.
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Commonwealth Bank