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.