NZ PPI Spikes On Dairy Farming Cost Increases

Producer prices pushed higher by substantial increases in dairy farming costs

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New Zealand's PPI spiked higher in 3Q on the back of surging costs in the dairy industry. Output prices rose 1.6%q/q in 3Q (JPMorgan 1.3%, consensus 1.1%), driven by a spike in the dairy cattle farming index (up 29%). The input producer price index rose 2.3%q/q thanks to a sharp increase in the dairy products manufacturing index (up 27%). According to Statistics New Zealand, a 5.8%q/q fall in electricity generation and supply was the only significant downward contributor to input prices. Over the 3Q, input prices rose at a greater rate than output prices, and at a faster rate that recorded in the 3Q CPI report. New Zealand's CPI rose just 0.5%q/q in 3Q despite a 1.6% increase in output prices, as the strong NZD pushed down tradables inflation.

Food price inflation is going to be a growing theme over the next year, as prices rise globally and the costs of producing food surge. Australia's severe drought, a reduction in European subsidies to farmers, and the greater implementation of biofuels have all added to the pressure on soft commodity prices.

One interesting takeaway point from the report is the gradual passthrough of costs from producers. From late 2005 through to the end of 2006, input prices rose at a much faster rate than output prices - suggesting firms were absorbing cost pressures across all lines of production. In 2007, however, output prices are creeping back above input prices in annual terms, and show firms are having to pass on additional input costs. Although still in its early stages, an increased willingness/ability to pass on costs to the consumer will add to non-tradables inflation down the track. Non-tradables CPI inflation is still at an uncomfortably high 3.7%oya, albeit a massive improvement from the 4.1% recorded in 2Q.

Regards,

Jarrod Kerr Economist J.P. Morgan Securities Australia Limited

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