Production costs up but farmers get less

By Felicity Anderson, Nzoom.com Business News Editor

Tuesday 28th May 2002

Higher prices of electricity generation and supply, forestry and logging and general wholesale trade prices have pushed up the Producers Price Index 0.4% in the March quarter.

For the year to the end of March the index (PPI) rose 3.1% compared with March 2001.

On the flip side, while the cost of materials required for production rose 2.8% for the March year, the index actually fell 0.1% in the three months to the end of March.

Darren Gibbs, Deutsche Bank's Senior Economist in Auckland, says both indexes point to a moderation in inflation pressures at the producer level. And given the appreciation of the NZ dollar that is likely to continue.

Statistics New Zealand (SNZ) says the PPI for the March quarter shows electricity generation and supply rose 2.5% in the quarter. That was largely due to wholesale market costs and new pricing structures for retailers after changes in line and energy costs.

The forestry and logging index was up 5.3%, mainly on the back of higher prices for logs on the domestic market.

Wholesale trade saw its PPI rise 0.5%, driven by increased prices for unprocessed primary products, especially wool.

But SNZ says the overall increase in output prices was offset by the lower cost of some inputs, especially the cost of some agricultural produce.

The livestock and cropping farming index declined 1.9%, as lamb prices fell.

The horticulture and fruit growing index fell 5.7%, as lower vegetable prices - especially tomatoes - flowed through.

And the dairy cattle farming index fell 1.1% reflecting lower prices for bulls and steers.

Deer prices also fell 22.6% in the quarter.

But one of the bigger falls in the cost of production was in air transport, where lower aviation fuel prices helped knocked the PPI for the sector by 4.4%. That follows a 2.8% fall in the December quarter.

Gibbs says Deutsche Bank has constructed an index of overall business costs, which weights together data from the PPI, the Capital Goods Price Index and the Quarterly Employment Survey.

"The index suggests that business costs rose 0.4% quarter on quarter in Q," Gibbs says. "As a result, annual business cost inflation declined to 2.5% from 2.6% previously. Annual business cost inflation is expected to decline below 2% during H2 2002."

Deutsche Bank says while the market is pricing in a 75 basis points rise in the Reserve Bank of New Zealand's official cash rate (OCR) after its July and August statements, it thinks on the back of the data that is too high.

The bank's team is forecasting a rise in the OCR by 25 basis points at both the RBNZ's July and August statements, lifting the OCR from 5.5% to 6%.

Comments from our readers

No comments yet