Producer price inflation stronger than expected; power and dairy prices jump

Producer Price inflation surged in the March quarter and was more than double the figures forecast by economists, although most think it will not be enough to change the Reserve Bank's thinking about hiking the Official Cash Rate in either June or July. Statistics NZ reported that producer input prices rose 1.3% in the March quarter from the December quarter, driven in large part by a 16.2% rise in electricity costs because drought lowered lake levels, and a 6.5% rise in milk prices. This was more than double the consensus of economists for growth of 0.5%. Statistics NZ reported output prices rose 1.8% in the March quarter from the December quarter, driven by a 29.6% rise in manufactured dairy product output prices and a 4.8% rise in electricity output prices. This was more than triple the consensus forecast by economists for a 0.5% rise. JP Morgan economist Helen Kevans said the stronger inflation figures had few implications for the Reserve Bank's plans for the Official Cash Rate. Here's her comments in more detail below.

With respect to monetary policy, although we believe the PPI numbers will have few implications for near-term policy decisions, we maintain our call for the first rate hike to be delivered in July. While we acknowledge the risk of a June move, growing uncertainties in the Euro area and weakness in some of the domestic indicators suggest the RBNZ has scope to sit on the sidelines for a little bit longer. Aside from the employment indicators, the data has generally disappointed. Retail sales volumes were up just 0.2%q/q over the March quarter, the slowest in over a year, and the softening housing market data, including weak mortgage approvals, underscores the patchiness in the domestic recovery. A June rate hike, therefore, in our view, is far from a done deal.