The June Quarterly Producer Price Index is in, reader. Producer inflation was lower than expected. That doesn’t mean prices have fallen, but that they grew at a slower rate. So here’s three cheers for making stuff.

Officially, producer prices rose 1.0% in the June quarter. Hmmm. Here’s 3.03 cheers for making stuff.

But it’s still a good result for the manufacturing sector. Commsec, for example, was predicting growth of 2.0% for the June quarter. The economy pulled a fast one and stopped buying.

The important thing is, if this is a prelude to a lower consumer inflation release on Wednesday, you might get that bounce in the ASX after all. The slightest prospect of an interest rate cut sent investors into bullish acrobatics yesterday. They did handstands until the close of trade. The All Ordinaries added 3%.

Note, reader, that those handstands are based partly on the assumption that producer prices are linked to consumer prices. That the cost of production finds its way through to retail prices…so that consumers can enjoy the same inflation as manufacturers.

A lot of people are expecting consumer inflation to follow producer inflation’s lead.

That may or may not happen. But here’s an interesting point. This is the official release. Take a glance at it. According to the ABS, the only items to actually fall in price were agricultural goods and electronic equipment. Everything else got more expensive. Especially fuel…refined petroleum rose in price by 8%.

If the fall in food prices filters through the economy, you get a bit of short term relief at the fruit and vegetable aisle later on in the year. And if the oil price continues dropping, there’s a good chance petrol might drop off too.

Prices, it seems, have risen enough for now. Inflation will be back, we suspect. And don’t rule out a surprise in the CPI release on Wednesday. But at this point, the economy could use a rest. Hopefully it’ll get one. If the CPI numbers come in at ankle-height too, shares will go up. That’s our prediction.

So that’s what shape the economy is this morning. There aren’t as many sharp corners on it as experts expected. And Energy prices haven’t moved a whole lot this week. You can see from the sidebar that oil is still trading at about US$130. But there’s one other ‘E’ that we reckon is driving the share market…Earnings results.

Flight Centre Predicts 40% Profit Growth

Flight Centre (ASX:FLT) added 13% yesterday. The company is forecasting a 40% rise in pre-tax profit. It beat analysts’ expectations.

That belies common logic. Airlines have been raising their fares for months. And it’s not the first surprisingly good result this earnings season. Qantas (ASX:QAN) and Country Road (ASX:CTY) surprised us yesterday. Good surprises are becoming as common as gloomy forecasts.

Maybe analysts have overestimated the affect of oil and interest rates this time around.

Russian Billionaire Challenges for Iron Ore Stake

You may have noticed that tiny iron junior Cape Lambert Iron (ASX:CFE) keeps appearing on the list of 52-week highs to your right. It’s been a short list recently. The bear in shares pulled out some hedge clippers and pruned it back a few centimetres.

But Cape Lambert is up 135% for the year. Last week some mystery buyer took a 15% stake in the company. It turns out Russian steel producer Evraz was the tall, dark stranger. It now holds 19.9% of Cape Lambert.

Behind Evraz stands one of the world’s richest men, Russian billionaire Roman Abramovich. Cape Lambert expects a bid from the steel maker in the next couple of days. The Russians have built their stake pretty quickly. It has only taken a few days. And it’s a sign they’re moving in for something bigger.

Cape Lambert is an explorer, but it has one massive ace: the Cape Lambert iron project. It holds a 1.56 billion tonne resource. That’s enough iron to sustain Rio Tinto’s current production rate for a decade.

Not all of the iron is recoverable. Some of it might be too deep to dig out at a profit. But it remains a big project. CFE is trading at 0.87 cents this morning. A takeover premium of 30% probably isn’t out of the question for a good iron junior these days. If Evraz does offer, it’ll probably be well over a dollar per share.

And speaking of dollars…here’s Gabriel with some thoughts for you on the Australian one.

By Allan Robinson.

This article is contributed by Money Morning. Click on the link below for more information and to subscribe to their free newsletter /20080722/inflation-ease. .html”

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