Producer prices signal inflation remains benign

Wednesday 19th August 2009

Prices paid by New Zealand producers for raw materials and services were unchanged in the second quarter, while output prices fell, indicating inflation is likely to remain benign in a climate of economic weakness.

Producer input prices registered no change in the three months through June, according to Statistics New Zealand. Economists had forecast a 0.1% decline.

Producer output prices fell 0.7%, as expected, as weaker export prices for milk powder, casein, cheese and butter resulted in a 19.9% slump in dairy products.

The data “is still consistent with the process of disinflation we’re going through,” said Robin Clements, senior economist at UBS New Zealand. “I don’t think we’ve seen the low in inflationary pressures.”

Reserve Bank Governor Alan Bollard last month said annual inflation is “expected to track comfortably within” the bank’s 1% to 3% target band over the medium-term, allowing him to keep the official cash rate at about current low levels through until the second half of 2010.

The bank forecasts annual inflation will average just 1% in the second half of 2009 and edge up to 1.3% in the first six months of next year.

Sheet and fabricated metal products helped keep a lid on producer input prices, falling 6.7% in the second quarter while electricity generation and supply was the biggest positive contribution, rising 10.4%. The gain reflected higher spot prices for electricity because of reduced hydro lake levels.

Petroleum, coal and basic chemicals was the next biggest contributor to the decline in output prices, falling 8.2%.

The finance index showed the biggest gain in output prices, jumping 13.2%, after a 14.6% advance in the first quarter. The increase in the finance index mainly reflected an increase in financial intermediation charges, which measures the spread between what banks lend at compared to their borrowing rates.

Businesswire.co.nz

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