Price growth in services accelerated again in June
Economic commentary by Jakub Seidler, Chief Economist of the CBA
Producer prices were mixed in June, with industrial producer prices falling slightly from May as expected by analysts, partly due to volatile energy items, but prices in other monitored segments rose month-on-month and the price trend was stronger than the long-term June trend of 2010-2019. In particular, crop prices have accelerated more noticeably, but they have been very volatile this year, and out of their traditional seasonality. After a favourable May, prices in services also accelerated again, again underlining the risk of more persistent inflation in this price segment. Today's numbers thus slightly spoil the generally positive May producer price developments, but the developments are choppy this year and one-month observations should not be overestimated. In general, however, today's numbers will support those views in the central bank that even with a more significant decline in inflation, they will continue to cut interest rates more cautiously.
Industrial producer prices fell 0.3% month-on-month in June, in line with analysts' estimates. Year-on-year price growth remained at 1%, as in May (Chart 1a). The stagnation in year-on-year growth was due to the energy components contributing slightly to the year-on-year decline in prices, while non-energy components contributed to the increase. Overall, however, price changes in June were relatively moderate, with the anti-inflationary effect still being exerted by lower oil prices, while prices of motor vehicles, chemicals and metals acted in the opposite direction. On the positive side, food prices continued to decline (-0.4% after -0.1% mom in May), down -3.8% y/y (after -3.7% mom in May).
Agricultural producer prices, on the other hand, rose by a noticeable 1.9% month-on-month in June, after falling strongly in the previous months. The rise was mainly driven by a significant increase in crop prices (+4.4% mom), which have been volatile and well outside their normal seasonality in recent months (Chart 2). On a year-on-year basis, the effect of a higher base has also been evident, moderating the year-on-year decline from -10 to -7.5% (see Chart 1b and Chart 3).
Construction prices rose marginally month-on-month (0.1%) and the year-on-year momentum has also increased slightly (Chart 1c).
Business services prices rose again month-on-month by 0.2% after a decline in May, accelerating the year-on-year rate from 3.2% to 3.5%. So, after May, this is again slightly worse news that price pressures in services remain elevated, as long-running prices fell slightly in June, while they have risen slightly this year (Chart 4). Price developments in business services, however, are heterogeneous, with growth in June driven mainly by advertising services (Chart 5), although even without them growth in services was slightly above the long-run average (-0.1% vs +0.2% mom).
June's industrial producer numbers look less favourable again after May, as agricultural producer price growth accelerated and month-on-month growth in services was also above its long-term June 2010-2019 average. However, even with June's developments, it is evident that inflationary pressures in services are gradually easing. Last but not least, the decline in food producer prices also continued, which is positive news for food price developments. Today's numbers thus look a bit mixed for the central bank, but they ended below the latest forecast estimate for Q2. However, despite lower inflation, signals from the central bank so far suggest that further rate cuts will only really be on the traditional "quarters" and today's producer numbers are more likely to reinforce these views at the central bank.
