Prices of capital goods fall in December quarter, while producers' general input and output prices rise, Stats NZ says

The cost of capital goods used by producers of goods and services in New Zealand fell during December as the exchange rate rose and building prices fell, according to Statistics New Zealand's Capital Goods Price Index.

Meanwhile, more general input prices paid by producers, and the output prices they received, both rose in the quarter due to higher wholesale trade, livestock and farm gate prices, Stats NZ said, releasing the Producers' Price Index (PPI).

JP Morgan economist Helen Kevans said the input and output price indexes would do little to spook the Reserve Bank of New Zealand, which is expected to leave the Official Cash Rate on hold at 3% until September this year.

"The PPI numbers will do little to prompt near term policy action, given soft demand, and with firms continuing to exhibit little pricing power," Kevans said.

Capital goods prices down

The capital goods price index (CPGI) fell 0.7% over the quarter, the largest quarterly fall since the September 1990 quarter, Stats NZ said.

The Capital Goods index measures the change in the price of physical capital goods purchased by New Zealand producers of goods and services. Capital goods are assets used to produce goods and services for more than one year.

Stats NZ said the major downward contributions to the CGPI came from:

• the plant, machinery, and equipment index (down 2.0 percent), reflecting the appreciation of the New Zealand dollar and lower computer equipment prices
• the residential buildings index (down 0.2 percent), reflecting lower dwelling and out-building prices
• the non-residential buildings index (down 0.2 percent), reflecting lower shop, office, and warehouse building prices.

In the year to the December 2010 quarter, the CGPI fell 0.3%, Stats NZ said.

Input and output prices up

Meanwhile, more general output and input prices rose over the quarter.

The producers price index measures changes in prices received by producers (known as output prices), and changes in the costs of production, excluding labour and depreciation costs (known as input prices).

Stats NZ said key influences on the outputs index, which was up 0.2 percent in the December 2010 quarter, were the:

• 1.7 percent rise for wholesale trade, reflecting higher wool and metal prices
• 4.4 percent rise for livestock and cropping farming, reflecting higher prices for wool, sheep, and lamb
• 4.3 percent rise for dairy cattle farming, reflecting higher farm-gate milk prices
• 6.1 percent fall for dairy product manufacturing, reflecting lower milk powder and cheese prices.

Key influences on the inputs index, which was up 0.9 percent in the December 2010 quarter, were the:

• 3.3 percent rise for wholesale trade, reflecting higher prices for gas condensate and imported crude oil
• 3.4 percent rise for dairy product manufacturing, reflecting higher farm-gate milk prices
• 1.0 percent rise in agriculture, forestry, and fishing, reflecting higher livestock sheep prices.

Together, the wholesale trade index, the dairy product manufacturing index, and the agriculture, forestry, and fishing index contributed about 70 percent of the overall 0.9 percent rise for the inputs index in the December 2010 quarter, Stats NZ said.

Output prices increased 4.3 percent overall in the year to the December 2010 quarter, while input prices were up 4.4 percent.

Here is JP Morgan economist Helen Kevans' take on the figures:

The PPI numbers released in New Zealand this morning will do little to spook the RBNZ into near term policy action. Prices received for producers’ output decelerated sharply from 1.2%q/q in 3Q to 0.2% in 4Q. Input price growth stayed fairly strong at 0.9%q/q, with higher milk prices boosting both indices, as expected. The discrepancy seems to partly reflect the sharp decline in dairy product manufacturing output prices, thanks to lower prices for milk powder and cheese.

Indeed, strong milk prices registered at the farm gate continue to feed through the value chain: prices for dairy product manufacturing were up 3.4%q/q on the inputs side, while prices received by dairy farmers were up 4.3%. Similarly, livestock again was strong, pushing input costs for the agriculture, forestry, and fishing sector up 1.0%q/q and prices received up 4.4%. Statistics NZ noted that dairy manufacturing and agriculture, forestry and fishing together contributed around 70% of the 0.9%q/q rise in the input gauge, indicating that supply pressure in New Zealand’s pivotal farming sector is putting some pressure on the bottom line. But amid soft demand conditions, most of this will likely be absorbed in margins.

With respect to monetary policy, we maintain that the RBNZ is firmly on hold in coming months. The PPI numbers will do little to prompt near term policy action, given soft demand, and with firms continuing to exhibit little pricing power.