Australia's producer price index rose 0.3 per cent in the fourth quarter of 2011 from the prior quarter, falling short of a 0.4 per cent rise expected by economists.
The PPI, which measures upstream prices for business, rose 2.9 per cent from a year earlier, the Australian Bureau of Statistics said today.
Economists said the PPI sets the scene for a particularly meek fourth-quarter rise in the consumer price index, due this Wednesday, which will give the Reserve Bank of Australia the go-ahead to cut rates for the third time since November 2011.
But economists warn that behind the story is an economy battling to deal with the massive forces acting upon it, including a soaring currency and a mining boom that is driving economic activity away from the densely populated eastern states.
"There is likely to be a stronger case for more accommodative monetary policy following the CPI," he added."The economy is clearly struggling to adjust to the pressures of the mining boom, becoming increasingly distorted by the strength of the Australian dollar and the outlook for minerals and infrastructure investment," said Alan Oster, chief economist at National Australia Bank.
Mr Oster expects the CPI to have risen by just 0.2 in the fourth quarter of 2011, held down in part by falling fruit and vegetable prices.
Scott Haslem, chief economist at UBS, said there is little or no barrier for the central bank to cut its cash rate target further from its current level of 4.25 per cent.
The board of the central bank will next meet February 7 to set its monetary policy.
"This provides no headwind for the RBA trimming rates again in coming months," he said.
The benign data comes as the Australian dollar climbs toward $US1.05, defying the gloom in the global economy, which recently prompted the International Monetary Fund to cut its world growth outlook.
Australia's miners are gearing up for the biggest investment splurge ever seen, buoyed by strong commodity prices and strong Asian demand for key exports like coal and iron ore. The boom is sending resources west to the commodity-rich precincts of Western Australia. About $450 billion in mining investment is on the drawing board in Australia.
But while the west booms, the more services-oriented eastern states are battling things like lost export competitiveness and rising import competition. Price cuts were recorded through the fourth quarter of 2011 in many areas of the economy, including retail sales, car rentals and real estate.
"In fact it is not just the retailers that are discounting but an array of service-orientated sectors. It is clear that the lack of activity in the economy is resulting in businesses reducing margins to entice consumers," said Craig James, chief economist at CommSec.
But there were pockets of sharp price hikes, including motor vehicle manufacturing prices, which rose 3.8 per cent in the 2011 fourth quarter.