Power price hikes drive producers' index up

Rising electricity prices were the driving force of an increase in the March quarter Producer Price Index (PPI), Statistics New Zealand said today.

Despite this, the industrial prices indices rose less than economists' forecasts.

Output prices rose 0.7 per cent and input prices rose 0.9 per cent against forecasts of a 1.6 per cent rise in inputs and a 0.9 per cent in outputs.

The PPI measures the average level of industrial input prices (excluding labour) and output prices at the farm and factory gate.

In PPI outputs, the electricity generation and supply index increased 6.1 per cent during the March, its sixth consecutive quarterly increase. The rise was attributable to the rising wholesale price of electricity.

Other significant positive contributors to the outputs index included the wholesale trade index (up 1.6 per cent, due to higher bulk diesel prices) and the dairy product manufacturing index (up 3.7 per cent, due to increased prices for whole milk powder).

Significant downward contributors to the PPI output index were the livestock and cropping farming index (down 9.3 per cent), finance index (down 3.1 per cent), and petroleum, coal and basic chemical manufacturing index (down 5.6 per cent).

The 0.9 per cent increase in input prices was largely driven by the electricity generation and supply index, up 8.8 per cent this quarter, reflecting higher bulk electricity prices.

Other noteworthy positive contributors to the inputs index were the construction index (up 2.8 per cent, due to the increased cost of construction trade services) and the wholesale trade index (up 0.7 per cent, reflecting the rise of world crude oil prices and higher domestic natural gas prices).

The overall increase in input prices was partly offset by a 10.2 per cent fall in the meat and meat product manufacturing index, the only significant downward contributor in the March quarter.

Lower wholesale prices for cattle (especially bulls and steers) and prime lambs was the key factor contributing to the negative movement of this index.

In the year to March, the PPI outputs index rose 4.0 per cent, up from 3.9 per cent in the year to December, and the PPI inputs index rose 7.2 per cent, up from 6.5 per cent in the December year.

Deutsche Bank economist Darren Gibbs said that in broad terms, it was about what was expected.

"It is not surprising to see continued pressure at the producer level, it is not just a New Zealand thing, it's a global thing given what's happening to energy prices and commodities in general. And clearly in New Zealand electricity was a factor in Q1."

He said there was a fair amount of cost pressure from energy sources, plus a tight labour market.

ASB economist Daniel Wills said firms were still obviously having trouble passing on higher inputs into higher outputs and there was a still a continuing theme of margin compression going on.

"But for how much longer they can continue diminishing margins remains to be seen.

"It's obviously a difficult sales environment at the moment, which puts further pressure on business going on."

- NZPA