New Zealand: producer input prices tumbled in 4Q

New Zealand: producer input prices tumbled in 4Q

• Input prices unexpectedly fell 2.2%q/q on lower crude prices

• Output prices rose 1.4%q/q, buoyed by higher dairy prices

• PPI report has few implications for monetary policy outlook

Pipeline price pressures eased significantly in New Zealand in the fourth quarter. Producer input prices tumbled 2.2%q/q, marking the first fall since 1Q07, after rising 3.7% in 3Q. Output prices grew 1.4%q/q in the December quarter, half the 2.8% rate recorded in the previous three months. It was the first quarter in seven that input prices "grew" at a slower rate than output prices, helping to some extent to alleviate the squeeze on profit margins. In fact, the 9.9%oya rise in output prices was the fastest in 21 years.

The main driver of the fall in input prices was the fuel wholesaling sector, owing to lower crude prices, which is within the wholesale trade component (-12%q/q). The second largest contributor to the decline was a plunge in the electricity generation and supply index, down 32%q/q. Wholesale electricity prices fell sharply thanks to an increase in hydro lake storage levels, according to Statistics New Zealand.

The rise in output prices in 4Q owed mainly to higher dairy prices. The dairy product manufacturing index rose 19%q/q as export prices for milk, butter, and cheese increased. Large price rises were also reported in the manufacturing component (+6.3%q/q) and the finance and insurance component (+7.3%). The electricity generation and supply index, which fell 14.4%q/q in 4Q, made the largest downward contribution to the increase in output prices.

The PPI print has few direct implications for the monetary policy outlook. The prolonged recession we expect in New Zealand, and the prospect that inflation will return to the RBNZ's target range in early 2009, point to further policy easing. We forecast that the RBNZ will cut the OCR another 75bp in March to 2.75%, and a terminal cash rate of 2.25% to be reached by April

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