The producer price index (PPI), a measure of products at the final stage of production, rose 1.3 per cent in the September quarter, according to data from the Australian Bureau of Statistics (ABS) on Monday.
It was a big rise, much bigger than most economists had expected. But, as is so often the case with outsized movements in measure of price, it was dominated by a single component. The price index for utilities - gas, electricity and water supply - jumped 8.9 per cent in the quarter.
Take that component out and the remaining 93.8 per cent of the index was up by only 0.8 per cent in the quarter and just 1.5 per cent through the year, rather than the 2.2 per cent annual rise recorded by the whole PPI.
But it's all too easy to select a component that's unusually strong or weak and put it aside when analysing data. In this case, it is important to remember that utility prices typically rise strongly in the September quarter. In the September quarter of 2009, for example, this component of the PPI rose 12.2 per cent.
In the same quarter a year before that, the increase was 7.3 per cent. In the measures of underlying inflation favoured by the Reserve Bank of Australia (RBA), components with an identifiable seasonal pattern are adjusted to offset that effect. Concentrating on quarter-to-quarter movements, seasonally or not, can obscure the big picture.
And that picture shows that while there was only a small rise in the PPI, excluding utilities, over the year to September - just 1.5 per cent - there was still a big turnaround from the previous year, when the PPI ex-utilities actually fell by 0.6 per cent.
Utilities are not like bananas or petrol, where a price rise one quarter is just as likely to be followed by a fall in the next. Prices of utilities tendto ratchet upward.
Those rises will eventually feed through into the price of every good or service that uses gas, electricity or water, and there is little that escapes that net. What's more, the imported component of the final-stage PPI posted some hefty falls in the final three quarters of 2009, a slide of 15.4 per cent in all.
But that downward trend was reversed with a rise of 1.4 per cent in the March quarter, a trivial fall of 0.1 per cent in the June quarter and a further rise of 0.9 per cent in the quarter ending September. And there is no utilities component in the imported subset of the PPI.
It seems clear that the buffer of imported deflation, that had been offsetting price rises stemming from a strong domestic economy, is wearing thin. So far this year, the domestic component of the final PPI has risen at an annualised pace 2.6 per cent (aside from utilities), while the imported section of the PPI has risen at a 2.8 per cent rate.
The PPI and the consumer price index (CPI), which the RBA uses as its yardstick for inflation, have some overlap in the goods and services they cover, but they are conceptually different. As a result, it's not possible to be certain about what changes in the PPI imply for the CPI.
Even so, it is clear that the inflation-suppressing effects of the global recession and the Australian's dollar remarkable recovery through the course of 2009 are waning. And that is showing up in faster PPI increases, no matter which way you slice the data.
Against this backdrop, it seem highly likely that the RBA's expectation, that underlying inflation is in the process of bottoming out, will be vindicated by the CPI figures due on Wednesday as well. And that in turn means the RBA may well ruin Melbourne Cup day with an interest rate rise.