NZ: Producers Price Index - Q2 2001
Data Flash (New Zealand)
The Producer Price Index for inputs rose 1.4% qoq in Q2 (market expectation: +1.2%) and was 8.1% higher than a year earlier. As expected, higher prices for crude oil (+9% qoq) and various agricultural commodities (eg meat and meat product manufacturing: +8.1% qoq) made a significant upward contribution to the index. A weaker NZD also contributed to the rise. Higher prices for electricity (+10.7% qoq) were also recorded, reflecting the flow-on effects of the drought on hydro lake levels and thus wholesale electricity prices. The Producer Price Index for outputs rose 1.3% qoq in Q2 (market expectation: +1.2%) and was 6.1% higher than a year earlier. A similar range of factors as above was responsible for the increase in output prices. At the output level, the inflation performance of the services sector was mixed, with high rates of inflation being recorded in the Finance and Insurance, Communication and Retail Trade sectors.
We think that the substantial rises in both input and output prices recorded during Q2 are likely to be the last in the current cycle. Gradually weakening commodity prices and a firming NZD are expected to sharply moderate producer price inflation over the period ahead, especially as far as the inputs index is concerned. However, in general, inflation in the services sector remains uncomfortably high and, in the near-term, is unlikely to moderate significantly given growing pressures on unit labour costs.
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 core CPI inflation will continue to linger in the upper half of the RBNZ's 0-3% target band over the coming year. As far as the RBNZ is concerned, today's data therefore likely reinforces the Bank's sense of the upside risks to inflation from price pressures that are already in the system.
That said, with global data remaining poor and the NZD now outperforming the RBNZ's assumption, we think the likelihood of a rate cut at the November Monetary Policy Statement (MPS) has increased somewhat. At this stage, we think that a November rate cut still remains less than a 50/50 proposition but a little higher than the 30% chance we thought likely following the August MPS.
After pricing out any further cut after the August MPS, current market pricing suggests a roughly 50/50 chance of a November rate cut. Next week's important US data (NAPM and Employment Report) and the actions of the RBA will be important in consolidating market opinion regarding the likely next move in the OCR.
As noted previously, barring a very substantial additional deterioration in global growth prospects, we think that the likelihood of a change in rates at the October interim review is low, given the range of important domestic data due for release between the October and November reviews.