Producer Prices Index - Q3 2001
Data Flash (New Zealand)
Producer Prices Index - Q3 2001
The Producer Price Index for inputs rose 2.0% qoq in Q3 (market expectation: +0.1%) and was 6.2% higher than a year earlier. The main contributors to this outcome were food manufacturing and electricity generation and supply. Food manufacturing contributed 68% of the overall increase, largely due to higher prices for dairy manufacturing (+19.2% qoq) and meat manufacturing (+8.4% qoq). A further 25% of the total increase resulted from the 17.1% rise in the input prices for the electricity generation and supply industry as a result of the winter electricity crisis. Lower crude oil prices made a partially offsetting downward contribution.
The Producer Price Index for outputs rose 1.4% qoq in Q3 (market expectation: +0.1%) and was 4.7% higher than a year earlier. The agriculture industry contributed more than 58% of the overall rise in output prices in Q3. The dairy cattle farming index rose by 21.5% qoq, reflecting end of season pay-outs to dairy farmers, while the livestock and cropping farm index rose by 8.9% qoq due to higher prices for sheep, lamb and cattle. The electricity generation and supply outputs index rose 13.2% as a result of the higher prices charged by power generators. Again, lower crude oil prices made a partially offsetting downward contribution.
Although both indexes rose by much more than the market or we had expected, this largely reflected analysts' failure to fully factor the already known sharp rise in prices in the agriculture sector, rather than significant new information about core inflation pressures in the economy. The market was unmoved by the data release.
Given the weakening trend in commodity prices over recent months, and our expectation of a steadily appreciating NZD (more so in the second half of next year) we think that the substantial rises in both input and output prices recorded during Q3 are likely to be the last in the current cycle. Indeed, with the prices of crude oil and agricultural commodity prices having fallen recently, and wholesale electricity prices having moved off their mid-winter highs, a decent sized negative reading looks to be in the offing when the Q4 data are released next November.
We have constructed an index of overall business costs which weights together data from the Producer Price Index for inputs (which only captures raw material costs), the Capital Goods Price index, and the Quarterly Employment Survey measure of labour costs. This index suggests that business costs rose 1.0% qoq in Q3, the same as in Q2. However, in annual terms, business cost inflation looks to have peaked. A broadly flat outcome is expected for business costs in Q4.
As discussed in our latest Economic Forecasts, we expect only a 30% chance of a further easing by the RBNZ during the current cycle, with such a move requiring a further significant weakening in the economic and inflation outlook beyond that already factored into the RBNZ gloomy November MPS projections.
Darren Gibbs, Senior Economist, New Zealand
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