NZ: Producer Price Index

Thu Nov 16 15:45:00 CST 2017

Actual Previous
Q/Q % change 1.0% 1.3%
Y/Y % change 5.3% 5.2%

New Zealand producer output prices increased by 1.0 percent on the quarter in the three months to September, with year-on-year growth picking up to 5.3 percent from 5.2 percent in the three months to June. Input prices also advanced 1.0 percent on the quarter in the three months to September, with the year-on-year change moderating from 4.7 percent to 4.3 percent..

Stronger output price inflation in the three months to September was mainly driven by electricity and dairy prices. Relatively low rainfall during the winter months resulted in higher costs for hydroelectric power stations, with input costs for electricity and gas procures up 5.9 percent on the quarter. This resulted in output prices in the sector increasing by 5.3 percent, with electricity prices paid by businesses up 6.8 percent on the quarter. Prices received by dairy farmers rose for a sixth consecutive quarter, reflecting ongoing strong demand from China. Trade data released last month showed exports to China increased by 33 percent on the year in September, with dairy exports up 26 percent.

Data released previously showed consumer price pressures strengthened modestly in the three months to September, with the year-on-year change in the consumer price index increasing to 1.9 percent from 1.7 percent in the three months to June.

The Producer Price Index (PPI) is a measure of the change in the general level of prices for the productive sector of New Zealand. The release contains indexes for both production outputs and production inputs along with indexes for selected commodities.

The PPI measures prices at the producer level before they are passed along to consumers. Since the producer price index measures prices of consumer goods and capital equipment, a portion of the inflation at the producer level gets passed through to the consumer price index (CPI). By tracking price pressures in the pipeline, investors can anticipate inflationary consequences in coming months. A producer's price is the amount received by a producer from the purchaser of a unit of goods or services produced as output less any value added tax similar deductible tax, invoiced to the purchaser.

The PPI is considered a precursor of both consumer price inflation and profits. If the prices paid to manufacturers increase, businesses are faced with either charging higher prices or they taking a cut in profits. The ability to pass along price increases depends on the strength and competitiveness of the marketplace.

The bond market rallies when the PPI decreases or posts only small increases, but bond prices fall when the PPI posts larger-than-expected gains. The equity market rallies with the bond market because low inflation promises low interest rates and is good for profits.