There are signs of inflationary pressures in a vital corner of Australia's economy

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Today’s RBA interest rates decision was largely a non-event, as it has been for the past two years.

Rates are on hold and it looks like they’ll stay that way for a long time. Move along.

The bank still hints that the next move in rates will be up rather than down, although how soon that’s likely to come is reflected in the market pricing a less than 50% probability of a hike by the end of next year.

Mortgage rate increases by the major banks and a parallel reinvigoration of focus on loan quality triggered by the financial services royal commission are resulting in a tightening of financial conditions in Australia without any action by the RBA.

The consensus is that rates will be on hold for a long time, perhaps a year or more.

One thing has the capacity to completely change the picture is a steady rise in inflation.

Data from a range of sources suggests there are real price pressures building in Australia’s manufacturing sector.

The Commonwealth Bank of Australia has a relatively new Purchasing Manager’s Index, or PMI, which surveys thousands of managers across the manufacturing sector each month in partnership with IHS Markit, which conducts a similar survey in nations around the world. The PMI surveys are closely followed by traders and strategists as a leading indicator of economic fundamentals.

This month’s Australia survey release noted:

… survey data pointed to sharp input cost and output price increases in September. Respective rates of inflation were elevated and both remained close to recent record highs. Panellists indicated that weakness in the Australian dollar had exacerbated raw material price rises.

The PMI survey is a diffusion index measuring expansion or contraction of activity levels in an industry sector. A reading of 50 indicates no change in activity levels from one month to the next, with numbers above 50 meaning activity is expanding, and anything below signalling contraction. The distance from 50 gives an indication of the rate. A typical PMI reading for a steadily expanding sector would be 51. Strong expansion is 55 and anything at 60 or above is hot.

Now that’s out of the way, look at this chart from the CBA manufacturing survey:


Input prices — the costs of manufacturers’ raw materials, parts, and labor costs — are surging.

This puts pressure on margins, but companies are starting to pass it on in how they charge for their products. That’s a healthy sign.

Senior economist at CBA, Gareth Aird, said: “The lower AUD continues to put upward pressure on input costs, as do rising new material costs. But firms have been able to lift output prices in response which indicates robust aggregate demand.”

The CBA data is corroborated by the AiGroup’s Performance of Manufacturing Index which showed wages in the sector are increasing at a record pace.



That shows input prices rising at a searing level of 70.

It’s a textbook environment for rising prices and the big question for the direction of interest rates is the extent to which this may now start start to be reflected in other parts of the economy beyond manufacturing, which is only around 7 per cent of GDP.

We may get an indication as early as tomorrow. The surveys from CBA and the AiGroup on the services sector — a much bigger components, representing well over half of the economy — are out in the morning.

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