Australia's producer price index for the final demand stage of production rose by 4.1 percent on the year in the three months to December, up from the increase of 3.8 percent in the three months to September. The index increased 0.9 percent on the quarter after surging 1.8 percent previously.

The increase in producer price inflation in the three months to December follows four consecutive declines and contrasts with a further moderation in consumer price inflation that quarter. Among the biggest contributors to the increase in producer price inflation were building and engineering construction costs, with officials noting the impact of labour shortages. Motor vehicle costs also rose at a sharp rate.

Other data released this week showed a rebound in export prices in the three months to December, up 5.6 percent on the quarter after declining 3.1 percent in the three months to September. This was driven by strong increases in iron ore and coal prices. Import prices rose 1.1 percent on the quarter after advancing 0.8 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.