NZ: pipeline price pressures build in 2Q

New Zealand: pipeline price pressures continued to build in 2Q

Pipeline price pressures continue to build in New Zealand. Producer input prices surged 5.6%q/q in 2Q, more than double the 2.3%q/q spike recorded in the March quarter and the largest rise since 1980. Output prices also grew at a much faster rate than expected, rising 3.5%q/q, the largest rise since 1985, and up from a 1.8% rise previously.

Not only are pipeline pressures clearly building, but the significantly faster rate of growth in input prices over output prices confirms that producers are finding it difficult to pass rising costs on to consumers, leaving profit margins squeezed. This is of little surprise given the sharp slowdown in domestic demand in recent months, which has diminished pricing power.

The main driver in the rise in output prices was the electricity generation and supply component, up 30.9%q/q – the largest rise since the series began; this was owing to lower lake levels in the hydro-generation sector, according to the stats agency. The surge in input prices also was driven by the electricity generation and supply index, up 50.8%q/q. Again, lower lake levels owing to the drought, were attributed for the rise in costs for electricity generation. The stats agency reported that higher electricity generation costs have led to increases in spot prices in the wholesale electricity market, which have pushed prices higher for producers.

On monetary policy, with significant price pressures in the pipeline, there is the risk that RBNZ officials may start to rethink the length and depth of the easing cycle on which it recently embarked. The RBNZ expects that inflation will peak at 5% in 3Q, but with producer price rises remaining significant, headline CPI is more likely to peak in early 2009 and hold well-above the RBNZ’s 1-3% target band for an extended period. Our forecast calls for 25bp rate cuts in September, October, and December, and further rate cuts in 2009, taking the key rate 6.25% by mid-2009. Upside surprises in the upcoming CPI data could, however, slow the pace of monetary easing.

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