A smaller than expected rise in producer prices is expected to set the tone for the release of a benign set of inflation data later this week.
The producer price index (PPI) at the final stage of production rose 0.3 per cent in the December quarter for an annual rise of 2.9 per cent, figures released by the Australian Bureau of Statistics (ABS) yesterday showed.
Economists had expected a 0.4 per cent rise over the quarter.
The PPI was up 0.3 per cent at the intermediate stage and 0.4 at the preliminary stage, the ABS also said.
Commonwealth Bank senior economist John Peters said the data suggested a downwards trend in inflation, which should be reflected in the key consumer price index (CPI) data tomorrow.
Peters said the high Australian dollar was keeping a lid on export prices and forcing inflation down.
"It's a bit of a fearless inflation fighter. It's a high currency and that is pushing down import prices and helping cap inflationary pressures."
Peters said he expected tomorrow's CPI figure to be low enough to allow the Reserve Bank of Australia to cut the official interest rate next month as it tries to deal with a worsening global economic outlook.
"We certainly think the door is well and truly open [for a rate cut] and the CPI won't stand in the way."
National Australia Bank group chief economist Alan Oster said the PPI figures were lower than he expected and a high Australian dollar was a key factor.
He said the data suggested the CPI figures may also be lower than market forecasts and this could lead the way for another cash rate cut by the RBA.
"To the extent that you get a lower CPI ... it probably means that you're definitely going to get one [cut in interest rates] in February and you may get another [cut] later on," he said.
The RBA cut the cash rate by 25 basis points in November and by the same amount last month.
The central bank cited lower inflation and global uncertainty as reasons for lower rates.
The board of the RBA next meets on February 7.
An AAP survey of 12 economists found a median forecast for a 0.2 per cent rise in headline CPI and a 0.6 increase in underlying inflation during the December quarter.
That would take the annual headline inflation rate to 3.3, while the underlying rate would be 2.5 - in the middle of the RBA target range of between 2 and 3 per cent.
RBC Capital Markets fixed income and currency strategist Michael Turner said the softer than expected PPI data showed a regional trend of lower food prices.
"Food prices are down 22 per cent in the quarter, which is a pretty steep drop," he said.
- AAPBy Evan Schwarten, Caroline Smith