By Roger J Kerr
The Producer’s Price Index data largely passed unnoticed by the NZ interest rate market on Friday; however the divergence in the input prices from the output prices over the last 12 months does potentially increase inflation risks going forward.
Because annual historical inflation to 30 June is seemingly benign at 1.1% there appears to be unwarranted complacency when it comes to future inflationary pressures.
My take on the PPI data was that business firms have absorbed 1.9% of raw material (input) costs over the past 12 months and have only been able to pass through a small part of the cost increases into higher selling prices.
The PPI output index only increasing 0.5% confirms that manufacturers have not been able to increase selling prices and profit margins have been squeezed.
Higher electricity, oil and some commodity prices were behind the cost increases.
When end demand does increase a little you would have to expect that local manufacturers will be seeking selling price increase to recoup the reduced profits over the past 12 months.
The whole situation points to elevated inflation risks going forward from the manufacturing sector on top of building costs, insurance, food and energy prices all moving higher as well.
A lower currency value over coming months will see the end of falling imported tradeable goods prices and the now typical 0.8% per quarter increase in non-tradable prices will be fully exposed.
I hope the new RBNZ Governor has got his head around all this stuff.
The uptick in demand for locally manufactured product will mostly be in the building sector, thus the Canterbury earthquake rebuild finally having some impact on the economy and inflation. Add on some demand pressures from increasing property values on retail sales and the 'benign' description of the inflation outlook appears horribly misplaced.
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* Roger J Kerr runs Asia Pacific Risk Management. He specialises in fixed interest securities and is a commentator on economics and markets. More commentary and useful information on fixed interest investing can be found at rogeradvice.com
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