Reuters reported that Australia's producer prices rose by a little more than expected last quarter as a softer currency pushed up import costs, yet annual growth in prices still slowed to a two year low in a promising sign for keeping consumer inflation contained.

Prices at the final stage of production rose 0.5% in the second quarter, just above forecasts of a 0.3% increase. Annual inflation braked to 1.1% from 1.4% in the first quarter and the lowest since mid 2010.

The relatively benign outcome should be mirrored in the more important consumer price index report due on July 25th 2012, which is expected to show the lowest pace of underlying inflation in more than a decade.

If forecasters are right, annual underlying inflation will be the lowest since 1998 at 1.9%, beneath the Reserve Bank of Australia's long term target band of 2% to 3%.

That is one reason financial markets are still pricing in at least 50 basis points of further cuts in the RBA's 3.5% cash rate. Growth in the headline CPI was seen slowing to just 1.3%, a long way down from last year's peak of 3.6%.

After easing in both May and June 2012, the central bank held steady this month to assess the impact of the moves and the uncertain outlook for the global economy.

Mr Ivan Colhoun head of Australian economics at ANZ said that "We think even a low underlying inflation result, by itself, will probably not be enough to spur the RBA to lower the cash rate in August 2012. That said, it would increase the probability of further rate cuts down the track, and we still consider that further modest easing of 50 basis points will be forthcoming by the end of 2012."

Source - Reuters

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