Australia's producer price index for the final demand stage of production rose by 5.8 percent on the year in the three months to December, moderating from an increase of 6.4 percent in the three months to September, which was the strongest producer price inflation since the series was initiated in 1999. The index rose 0.7 percent on the quarter after advancing 1.9 percent previously.

Consumer price index data released earlier in the week, in contrast, showed a further acceleration in price pressures, with headline consumer inflation picking up from 7.3 percent in the three months to September to 7.8 percent in the three months to December, further above the Reserve Bank of Australia's target range of 2.0 percent to 3.0 percent. Other data released today showed a smaller drop in export prices in the three months to December, down 0.9 percent on the quarter after falling 3.6 percent in the three months to September, and a smaller increase in import prices, up 1.8 percent on the quarter after increasing 3.0 percent previously.

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.