Australia's producer price index for the final demand stage of production rose by 3.9 percent on the year in the three months to June, slowing from an increase of 4.9 percent in the three months to March. This is third consecutive fall in producer price inflation, in line with other indicators showing price pressures are moderating. The index rose 0.5 percent on the quarter after advancing 0.7 percent previously.

Consumer price index data released earlier in the week also showed an easing in price pressures, with headline consumer inflation falling from 7.0 percent in the three months to March to 6.0 percent in the three months to June, closer to the Reserve Bank of Australia's target range of 2.0 percent to 3.0 percent. Other data released this week showed a big fall in export prices in the three months to June, down 8.5 percent on the quarter after advancing 1.6 percent in the three months to March, and a smaller decline in import prices, down 0.8 percent on the quarter after falling 4.2 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.