Producer prices are generally falling, while prices of services are rising
Economic commentary by Jakub Seidler, Chief Economist of the CBA
Producer prices were mixed in February, while the double-digit year-on-year decline in agricultural producer prices continued, industrial producer prices rose slightly above expectations and, in particular, prices of services rose faster month-on-month than last year and their year-on-year growth increased compared with January (see Chart 1). Today's figures will thus lend some support to the arguments of those Board members who prefer a more cautious approach to rate cuts because of concerns that inflation in services prices may be more persistent.
Industrial producer prices rose by 0.5% mom in February, while the analyst consensus had expected a more moderate 0.3% rise. Year-on-year momentum then slowed to a decline from -1.8% to -0.9% (vs. expectations of -1.2% yoy). However, most of the price developments in February were driven by coke prices and petroleum products, where the rise in global oil prices, a generally volatile item, was reflected. This was behind both the month-on-month price increase and the moderation in the year-on-year decline. Another inflationary factor was electricity prices and motor vehicle prices. Food producer prices fell by 0.2% month-on-month and have been falling steadily for almost a year. In annual terms, the decline intensified to 5.9%. This is positive news on the grounds that these prices also largely determine the evolution of food prices in the consumer basket and foreshadow that food prices should continue to be anti-inflationary in the months ahead.
Agricultural producer prices also continued their double-digit year-on-year decline in February, although the decline was slightly smaller than in January (Chart 2). The 0.7% rise in prices continued for the second month in a row, but is still below normal seasonality, especially for crop production (Chart 3).
Prices for construction work rose marginally month-on-month (0.1%), which is in line with normal developments, but prices are also only preliminary. Prices for construction materials were broadly flat and down 2% y-o-y.
Prices for business services rose by 1.5%, a slightly stronger increase than in February 2023 (+1.1) and a figure noticeably above the usual February level in recent years. The rise was mainly driven by a 13% month-on-month increase in prices for advertising services, but non-advertising services also rose more than the long-term average (+0.7%) - although the increase was similar in 2018 and 2019. In addition to advertising services, prices for programming or real estate services, employment, and legal and accounting services rose more strongly.
February's figures thus confirm the continued disinflationary and, in some components, deflationary trend, especially for farm and food producer prices, suggesting continued limited upward pressure on food prices. On the other hand, services prices are rising above normal seasonality and, as in the case of consumer prices, their growth remains relatively persistent. Thus, the central bank is likely to remain cautious at its meeting on Wednesday, according to statements by its officials in the media, and will cut rates by only half a percentage point, although the debate is likely to be between a half or three-quarters of a percentage point cut.
