By Ben Jarman*
The PPI numbers this morning showed that growth in prices received by New Zealand firms slowed significantly in 3Q.
Earlier in the year, large rises in prices received for meat, livestock, and also oil had pushed the output PPI up an average of 1.6%q/q in 1H11. With these impulses fading, and dairy prices sliding, the output PPI slowed significantly to 0.2%q/q in 3Q.
The trade price data for the quarter have yet to be delivered, but it seems likely that the strength of NZD will have played a role in today’s result, pulling down both prices paid (inputs) and received (outputs) in domestic currency terms.
NZ Stats noted today that at the time of their calculation, NZD was up nearly 5%q/q against USD over the quarter.
The largest drag on prices received was in the dairy sector, with the dairy cattle farming output index (-12.3%q/q) and the dairy manufacturing index (-3.6%q/q) both losing ground.
These declines capture lower prices received at the farm-gate, and a decline in milk powder prices. Providing some upside support, though, were energy prices, with the electricity and gas supply index up 12.8%q/q, reflecting higher spot electricity prices over the quarter.
Prices for inputs were relatively resilient, up 0.6%q/q. Energy price rises generally push input prices up more than they do output prices, given the pervasiveness of energy as an input compared with its production (i.e. output), which is concentrated in a small number of firms. In today’s report that impulse was significant, with the electricity and gas input price index up 19.3%q/q.
This is the largest rise since mid-2008, and while we do not expect further rises of the same magnitude, today’s report shows that Kiwi firms are vulnerable to margin squeeze if energy prices continue to rise at a solid pace.
As always, the PPI data do not contain much informational content given that 3Q CPI was delivered a couple of weeks ago. Today’s report does, however, consolidate the existing message that the demand side measures of inflation (core CPI, inflation expectations, producer prices received) are easing.
We remain of the view that, aside from some RWC/holiday-boosted retail sales, the data are vindicating the RBNZ’s prior “insurance” rate cut, and will likely see Governor Bollard comfortable that current very accommodative policy settings are not presenting a risk to price stability.
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Ben K Jarman is an analyst at JP Morgan Australia and is based in Sydney.
ben.k.jarman@jpmorgan.com
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