New Zealand producer output prices fell 0.1 percent on the quarter in the three months to December after advancing 1.5 percent in the three months to September, with year-over-year growth slowing from 4.2 percent to 3.3 percent. The moderation in headline producer price inflation was largely driven by a sharp turnaround in electricity and gas prices, which fell 6.7 percent on the year after a previous increase of 26.4 percent. Construction and transport prices also recorded weaker growth. This was partly offset by bigger increases in the manufacturing and primary sectors.

Data released last month showed steady consumer price pressures in the three months to December, with headline CPI inflation unchanged at 2.2 percent, within the Reserve Bank of New Zealand's target range of 1.0 percent to 3.0 percent. Officials have cut policy rates at their three most recent policy meetings and are expected to do so again later today.

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.