Producer Price Inflation : -1.5% in December

The December '09 figures for the PPI came out today, showing price weakness for third stage Production of -1.5% (a very low figure). Basically this index measures the costs of materials involved in the production of goods and services. -1.5% is the lowest figure on record in 10 years. This can only be good for manufacturers, but no so good for raw material suppliers.

Also bodes well for the inflationary figure, due to be released on Wednesday of next week. As shown by the graph below, the PPI and CPI usually follow the same trend (though the CPI isn't as volatile)

Based on the PPI, I would suggest that inflation will remain constant or decrease slightly. The only danger with this prediction is that the prices of goods and services also take into account wages (or human resource cost). There have been indications in the press that wages might be on the rise again; though the trend increase was only at 0.7% over the September '09 quarter. As Wages make up a large percentage of prices, wage inflation may cause the CPI to increase.

There is also the danger that the strong Australia dollar is camouflaging some price increases. After all, from the stats, domestic prices increased by 0.3% over the year, while import prices decreased 5.2%. This import price deflation is directly proportional to the strength of the Australian dollar.

Regardless of these factors, I do believe that inflation will remain steady or reduce to just under the 1.3% presently recorded.