New Zealand producer output prices rose 1.5 percent on the quarter in the three months to September, up from the 1.1 percent increase recorded in the three months to June, with year-over-year growth accelerating from 3.4 percent to 4.2 percent. This is the strongest year-over-year growth in six quarters.

The increase in headline producer price inflation was largely driven by the manufacturing sector, with output prices there surging 6.7 percent on the year after an increase of 0.7 percent previously. Prices in the primary sector rose 1.0 percent after a previous increase of 1.3 percent. Prices rose at a slower pace in most parts of the services sector and in the construction sector.

Data released last month, in contrast, showed weaker consumer price pressures in the three months to September, with headline CPI inflation slowing to 2.2 percent from 3.30 percent in the three months to June, back within the Reserve Bank of New Zealand's target range of 1.0 percent to 3.0 percent. Officials cut policy rates at their two most recent policy meetings, reflecting their assessment the outlook for growth has weakened and that consumer price inflation is likely to moderate further in coming quarters.

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.