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Data Flash: Producer Prices Q2/2000

Data Flash: Producer Prices Q2/2000

Data Flash (New Zealand) Producer Prices Q2/2000

Key Points

Producer input prices rose 1.2% qoq in Q2 and were 5.5% higher than in mid-1999. Producer output prices rose 1.0% qoq and were 3.9% higher than last year. Higher commodity prices and the flow-on effects into manufacturing production and the distribution sector were the key drivers of both indexes. Surprisingly, despite the collapse in building activity, construction cost inflation continued at an annualised rate of around 2.5%.

Key Points

The PPI data confirmed the upstream price pressure in the NZ economy related to high prices of oil and other commodities, as well as the weak NZD. The PPI data is consistent with our estimate of Q2 import price inflation in excess of 4% qoq (data to be released on 11 September). Such a figure and the continued NZD decline highlights the significant upside risk to the RBNZ's forecast of -0.6% for import price inflation over the year to March 2001. Upstream price pressures and flow-on effects into the CPI are going to be significantly more problematic than the Bank acknowledged in its latest Policy Statement. Comments by importers and major retail chains about the inability to hold prices in the light of external cost pressure have weakened the argument that soft domestic demand will prevent a major pass-through into the CPI. We continue to forecast annual CPI inflation to reach 3% over the next few quarters and remain above 2% for a prolonged period. It will be a major challenge for the RBNZ to prevent trend inflation from settling above 2% without obstructing the required adjustment of the economy to a lower dollar.

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