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Business inflation on the decline. -

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ELEANOR HALL: There's potentially good news for Australians with a mortgage this lunchtime with an
important measure of inflation posting a surprise fall. The Producer Price Index, which measures
business inflation, fell in the final quarter of last year and this is dampening speculation that
the Reserve Bank board will raise interest rates once again next week.

With the details I'm joined in the studio now by our business editor Peter Ryan.

So Peter, most economists had been expecting a slight rise in business inflation. Why didn't that
happen?

PETER RYAN: Well, Eleanor most economists had tipped a rise of 0.2 of 1 per cent in the December
quarter but what they got was a 0.4 of a per cent fall quarter on quarter, and a 1.5 per cent
decrease on the year - mainly due to the stronger Australian dollar. So basically gains in the
Australian currency have cut the cost of imported goods.

So let's have a look at what the ABS has said. They say there have been price decreases in
petroleum refining - down 6.9 per cent. Electronic equipment manufacturing down 9.1 per cent.
Industrial machinery and equipment manufacturing costs are down 2.5 per cent but a better result
than we've seen today has been partially offset by price increases in agriculture and building
construction.

ELEANOR HALL: How important are these figures in terms of the RBA's interest rates calculations?
How do they figure into the all-important question of inflation?

PETER RYAN: Well, the way economists look at it, the PPI is pretty much just a warm up to the main
inflation event. The big day is on Wednesday when the key measure of inflation, the Consumer Price
Index for the December quarter is released.

Economists are tipping that headline inflation will rise from a decade low of 1.3 per cent to 2.3
per cent and that's inside the RBA's comfort zone of 2 to 3 per cent but the Reserve Bank likes to
look at underlying or core inflation and that's expected to rise and will importantly remain
outside that target band I just mentioned.

So if the forecast is correct, and we know that economists don't get it right all the time, just
judging by today's outcome or if there is an unexpected blowout, we might be confronting a tighter
situation and that could see the RBA decide to lift rates or consider lifting rates for the fourth
consecutive quarter and that would take the official rate up from 3.75 to 4 per cent.

ELEANOR HALL: So how has the market reacted to this inflation news?

PETER RYAN: Well, currency markets certainly appear to be tempering the chance of a rates rise on
Tuesday of next week. The Australian dollar fell slightly as soon as the producer price report hit,
but a short time ago it had climbed back to around 90.4 US cents.

The share market has taken the result in its stride - it was already subdued because of a lot of
uncertainty from the United States about financial regulation. A short time ago the All Ords was
down just over 1 per cent at 4,720.

ELEANOR HALL: Business editor Peter Ryan, thank you.