New Zealand producer output prices rose 0.9 percent on the quarter in the three months to March, up from the 0.7 percent increase recorded in the three months to December, with year-over-year growth picking up from 2.0 percent to 2.6 percent. The increase in headline producer price inflation reflects smaller declines in key sectors. Output prices in the manufacturing sector fell at a less pronounced rate, down 0.9 percent on the year after a decline of 3.5 percent previously, while prices in the primary sector fell 1.1 percent after a previous decline of 4.9 percent. Prices rose at a steady pace in most parts of the services sector.

Data released last month showed weaker consumer price pressures in the three months to March, with headline CPI inflation slowing to 4.0 percent from 4.7 percent in the three months to December, closer to the Reserve Bank of New Zealand's target range of 1.0 percent to 3.0 percent. Officials left policy rates on hold at their most recent meeting last month, reflecting their assessment that consumer price inflation is likely to moderate further in coming quarters. The next RBNZ policy meeting will take place next week.

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.