August 19, 2021

Business price inflation accelerating

Faster consumer price inflation likely to follow

Most of the current economic indicators look good, but the latest price indexes paint a not so great picture for New Zealand businesses.

Although the New Zealand economy had a swift and healthy recovery from the first COVID-19 lockdown, the monetary response to COVID-19 leaves the likelihood of faster inflation almost inevitable. In fact, the latest business price indexes indicate that inflation may already be accelerating in New Zealand.

The largest quarterly increase in the capital good indexes since 1990.

The Capital Goods Index (CGI) is a measure of price levels for fixed capital goods purchased by producers in New Zealand. The June 2021 quarter led to the largest quarterly increase in the CGI since 1990, the earliest year Statistics New Zealand provides, increasing by three percent from the previous quarter. For over twenty years, the quarterly change in CGI has remained relatively steady, fluctuating around 0.5 and 1.5 percent.

Higher input prices are leading to higher output prices.

Similar results are seen in the Producers Price Indexes (PPI), with both the input and output indexes seeing large quarterly increases.

The PPI is a measurement of price levels for the supply (output) and the use (inputs) of goods and services by producers. The June 2021 quarter has seen a significant quarterly increase in both the output and input PPI. Producers in New Zealand are now experiencing higher price levels, both when goods and services are entering the production process and when they are leaving the production process.

The input PPI measures changes in the prices of goods and services that producers need to pay. In June 2021, the input PPI had a quarterly percentage increase of three percent, the largest quarterly increase in over twenty years. The main industries driving this significantly large increase to the input PPI were:

  • Petroleum and coal product manufacturing, which increased by 19.8 percent
  • Electricity and gas supply, which increased by 17 percent
  • Primary metal and metal product manufacturing, which increased by 6.2 percent.

These three industries experienced significant increases to the average price levels of inputs into their production process in the June 2021 quarter. With all other remaining industries also experiencing increases to the average price levels of inputs, just not to the same magnitude.

The output PPI measures changes in the prices producers are receiving. In June 2021, the output PPI had a quarterly increase of 2.9 percent. This is the largest quarterly increase in over ten years, and is largely accounted for by the following industries:

  • Petroleum and coal product manufacturing, which increased by 16.3 percent
  • Electricity and gas supply, which increased by 14.3 percent
  • Dairy product manufacturing, which increased by 13.8 percent.

Following significant quarterly increases to the average price levels of inputs, producers have had to increase the average price levels of outputs. Particularly for producers operating in petroleum and coal product manufacturing, and electricity and gas supply, who suffered significant increases to price levels of inputs leaving them no choice but to significantly increase the average price levels of outputs.

Consumers will ultimately bear the burden of higher prices.

Producers often have the ability to pass on the higher input prices in the form of higher output prices. However, consumers cannot easily pass on the higher prices they now receive. In other words, the pain of increased inflation will ultimately be felt most by households. In the June 2021 quarter, the annual rate of increase in the Consumer Price Index was 3.3 percent. This was up from just 1.5 percent in the March 2021 quarter. Sadly, based on the latest PPI measures, worse is yet to come for consumers.