October 27, 2016 07:30 CDT

Consensus Actual Previous
Quarter over Quarter 0.6% 0.3% 0.1%
Year over Year 0.8% 0.5% 1.0%

Australia's producer price index for the final demand stage of production rose 0.3 percent quarter-on-quarter in the three months to September, up from 0.1 percent in the three months to June, but below the consensus forecast for an increase of 0.6 percent.

The quarterly increase in the headline index was mainly driven by agricultural-related industries and utilities. This was offset by falls in prices received by manufacturers.

Year-on-year growth in the index moderated from 1.0 percent in the three months to June to 0.5 percent in the three months to September, also below the consensus forecast of 0.8 percent. Annual producer price inflation has now fallen for three consecutive quarters and is at its lowest level since early 2010.

The producer price index (PPI) is a measure of the average price level for a fixed basket of capital and consumer goods paid by producers. This release contains indexes for final demand, intermediate demand and preliminary demand along with indexes for industries. The PPI for final demand is considered the main index.

The PPI measures prices at the producer level before they are passed along to consumers. Since the producer price index measures prices of consumer goods and capital equipment, a portion of the inflation at the producer level gets passed through to the consumer price index (CPI). By tracking price pressures in the pipeline, investors can anticipate inflationary consequences in coming months. A producer's price is the amount received by a producer from the purchaser of a unit of goods or services produced as output less any value added tax similar deductible tax, invoiced to the purchaser. It excludes any transportation charges invoiced separately by the producer. Unlike most other countries, Australia calculates its PPI on a quarterly basis.

The PPI is considered a precursor of both consumer price inflation and profits. If the prices paid to manufacturers increase, businesses are faced with either charging higher prices or they taking a cut in profits. The ability to pass along price increases depends on the strength and competitiveness of the marketplace.

The bond market rallies when the PPI decreases or posts only small increases, but bond prices fall when the PPI posts larger-than-expected gains. The equity market rallies with the bond market because low inflation promises low interest rates and is good for profits.