Producers Price Index: June 2009 quarter

Please note that revisions have been made to some historical Producers Price Index (PPI) time series. For more information please refer to the revisions section at the end of this commentary.

Outputs

Output prices for all industries in the PPI fell 0.7 percent in the June 2009 quarter, following a fall of 1.4 percent in the March 2009 quarter, and a rise of 1.4 percent in the December 2008 quarter. The dairy product manufacturing index and the petroleum, coal and basic chemical manufacturing index were the prominent contributors to lower output prices in the latest quarter.

The dairy product manufacturing index (down 19.9 percent) had the largest downward impact on output prices in the June 2009 quarter. The fall in the latest quarter followed a 24.3 percent fall in the March 2009 quarter and a 19.2 percent rise in the December 2008 quarter. The main drivers of the index in the latest quarter were lower prices for exported dairy products such as whole milk powder, casein, cheese, and butter. In the year to the June 2009 quarter, the index fell 29.6 percent which is the largest annual fall since the series began in the June 1994 quarter. This compares with a 41.0 percent rise in the year to the June 2008 quarter and a 1.9 percent fall in the year to the June 2007 quarter.

The petroleum, coal and basic chemical manufacturing index (down 8.2 percent) was the second largest contributor to the fall in output prices in the June 2009 quarter. This fall follows a revised 18.9 percent fall in the March 2009 quarter and a revised rise of 27.3 percent in the December 2008 quarter. The latest quarterly fall in the index was mainly driven by lower refinery fees for petroleum products. In the year to the June 2009 quarter, the index rose 7.3 percent, following a revised rise of 10.1 percent in the year to the June 2008 quarter and a revised 4.5 percent fall in the year to the June 2007 quarter. 

The major offsetting effect on output prices in the latest quarter came from the finance index (up 13.2 percent), following rises of 14.6 percent and 10.0 percent in the March 2009 and the December 2008 quarters, respectively. The latest quarterly increase was mainly driven by an increase in the financial intermediation charges index. For more details, please see the 'pricing financial services' section at the end of this commentary.

The second largest offsetting impact on producers' output prices came from the electricity generation and supply index (up 11.0 percent) following three consecutive quarterly falls. The latest quarterly rise was driven by higher spot prices for commercial electricity in the winter season. In the year to the June 2009 quarter, the index fell 23.8 percent, compared with a rise of 41.7 percent in the year to the June 2008 quarter, and a 4.6 percent fall in the year to the June 2007 quarter.

In the year to the June 2009 quarter, the PPI outputs index rose 2.1 percent, compared with rises of 8.5 percent in the year to the June 2008 quarter, and 1.4 percent in the year to the June 2007 quarter.  

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Inputs

The PPI all industries inputs index did not change in the June 2009 quarter. This follows falls of 2.5 percent in the March 2009 quarter, and 2.2 percent in the December 2008 quarter.

The sheet and fabricated metal product manufacturing index (down 6.7 percent) made the most significant downward contribution to the PPI inputs index. The fall this quarter is the largest since the series began in the June 1994 quarter. The latest quarterly fall follows a 1.2 percent decrease in the March 2009 quarter, and a 3.7 percent increase in the December 2008 quarter. Respondents cited lower prices for raw materials, the appreciation of the New Zealand dollar, and lower demand due to worsening economic conditions as the main drivers of this fall.

In the year to the June 2009 quarter, the sheet and fabricated metal product manufacturing index rose 2.7 percent. This rise compares with a 15.8 percent rise in the year to the June 2008 quarter and a 4.0 percent rise in the year to the June 2007 quarter.

The second-largest downward contribution came from the machinery and equipment manufacturing index, which fell 4.5 percent in the June 2009 quarter. This latest fall is the largest since the series began in the June 1994 quarter, and follows rises of 0.1 percent in the March 2009 quarter, and 3.1 percent in the December 2008 quarter. The machinery and equipment manufacturing index was mainly driven down by lower prices for raw materials and imported iron and steel products, appreciation of the New Zealand dollar, and lower demand.

The machinery and equipment manufacturing index rose 2.4 percent, in the year to the June 2009 quarter. This compares with rises of 5.2 percent in the year to the June 2008 quarter and 10.3 percent in the year to the June 2007 quarter.

The electricity generation and supply index (up 10.4 percent) made the most significant upward contribution to the PPI inputs index. The rise follows consecutive quarterly falls of 1.5 percent and 32.3 percent in the March 2009 quarter, and the December 2008 quarter, respectively. Respondents cited higher electricity spot market prices due to the hydro supply conditions and the seasonal wholesale market as the main reasons for the increase in electricity generation and supply prices. Higher prices for natural gas, which is used in the generation of electricity, also contributed to the rise in this index.

Despite the latest quarterly rise, in the year to the June 2009 quarter the electricity generation and supply index fell 49.5 percent – the largest annual fall since the series began in the June 1994 quarter. This follows an 85.4 percent increase in the year to the June 2008 quarter and a 12.7 percent decrease in the year to the June 2007 quarter.

The meat and meat product manufacturing index (up 4.9 percent) made the second-largest upward contribution to the PPI inputs index this quarter. The rise in the index follows falls of 7.3 percent in the March 2009 quarter, and 1.8 percent in the December 2008 quarter. Higher schedule prices for prime sheep and lamb, and prime beef were the main reasons for the price increases in the latest quarter.

In the year to the June 2009 quarter, the meat and meat product manufacturing index rose 16.9 percent. This compares with an 11.4 percent rise in the year to the June 2008 quarter and a fall of 3.9 percent in the year to the June 2007 quarter.

Input prices for all industries fell 1.2 percent in the year to the June 2009 quarter. This is the first annual fall in the PPI inputs index since the fall of 0.3 percent in the year to the March 2004 quarter. The latest annual fall contrasts with rises of 12.3 percent in the year to the June 2008 quarter and 0.8 percent in the year to the June 2007 quarter. 

 

 

Commodities

Processed meat: sheep and lamb fell 5.1 percent in the June 2009 quarter, recording the first fall since a fall of 2.4 percent in the March 2008 quarter. In comparison, the index rose 6.0 percent in the March 2009 quarter and 7.7 percent in the December 2008 quarter. The latest quarterly fall was mainly driven by lower export prices for frozen lamb cuts. The index rose 22.2 percent and 11.4 percent in the years to the June 2009 and to the June 2008 quarters, respectively, and fell 12.7 percent in the year to the June 2007 quarter.

The wool index fell 14.6 percent in the June 2009 quarter, following falls of 12.4 percent in the March 2009 quarter and 3.1 percent in the December 2008 quarter. The latest quarterly fall was partly driven by lower auction prices for crossbred wool. In the year to the June 2009 quarter, the wool index fell 23.0 percent compared with a rise of 8.3 percent in the year to the June 2008 quarter and a fall of 9.6 percent in the year to the June 2007 quarter. Both the latest quarterly and annual falls were the largest since the series began in the June 1994 quarter.

The paper index fell 9.1 percent in the June 2009 quarter, following a 0.8 percent fall in the March 2009 quarter, and an 11.3 percent rise in the December 2008 quarter. The latest fall was the largest since the series began in the June 1994 quarter and was driven by lower international prices and the exchange rate. In the years to the June 2009 and the June 2008 quarters, the paper index rose 6.9 percent and 2.6 percent respectively.

The international sea freight index fell 9.1 percent in the June 2009 quarter, driven by the exchange rate. This followed a 5.9 percent fall in the March 2009 quarter and a 14.9 percent rise in the December 2008 quarter. In the year to the June 2009 quarter, the index rose 14.1 percent compared with the falls of 7.9 percent and 17.8 percent in the years to the June 2008 and the June 2007 quarters, respectively.

Impact of exchange rates

Revisions

Revisions have been made to some historical PPI series, to correct an error in the treatment of a chemical product denominated in a foreign currency. This error was introduced when a wider set of foreign currency-related errors were corrected in the June 2008 quarter.

Revisions have been made to the following series, as far back as the December 1998 quarter.

• Manufacturing outputs (PPIQ.SUC)
• Petroleum, coal and basic chemical manufacturing outputs (PPIQ.SUC10)
• Chemicals, petroleum and plastics outputs (PPIQ.SUX09)
• Manufacturing inputs (PPIQ.SNC)
• Wood product manufacturing inputs (PPIQ.SNC07)
• Petroleum, coal and basic chemical manufacturing inputs (PPIQ.SNC10)
• Chemicals, petroleum and plastics inputs (PPIQ.SNX09).

There was a small impact on the PPI all industries outputs and inputs indexes for some periods, but they have not been revised as the impact was insignificant.

The attached table gives the originally published and revised index numbers, quarterly percentage changes and annual percentage changes from the December 1998 quarter to the March 2009 quarter. The revised index numbers are also available on Infoshare (under Economic indicators, Producers Price Index).

Pricing financial services

The output of the banking sector can be broadly categorised in two ways. Firstly there are those explicit services provided by banks (and other financial intermediaries) that are explicitly charged for, such as bank account fees. Secondly, there is the general intermediation service provided by these businesses which is not explicitly charged for, but which is implicitly charged for through financial institutions lending money out at higher interest rates than they pay to depositors (or organisations from whom they borrow the funds).

Pricing the explicit services provided by financial intermediaries is relatively straightforward, and the PPI outputs index for the finance industry contains prices to represent this component of their output.

Pricing the intermediation services provided by financial institutions that are not explicitly charged for is more problematic. Within the PPI outputs index, the approach that is adopted is to determine the differential interest rate (referred to as a "spread") between banks' lending activities (referred to as "claims") compared with their borrowing activities (referred to as "funding"), and apply this spread to an inflation-adjusted base period value of financial intermediation. The 'price that is then derived can be thought of as the charge the banks implicitly make to intermediate sufficient funds needed to purchase a base period volume of goods/services. The claims and funding rates used in this calculation are sourced from the Reserve Bank of New Zealand (http://www.rbnz.govt.nz/statistics/monfin/c10/data.html), while the inflation adjustment is carried out using the all groups consumers price index.

One limitation of the above approach is that the weighted average interest rates on funding, sourced from the published information available from the Reserve Bank exclude foreign currency funding, which accounted for approximately 30 percent of total registered bank funding at December 2008. The Reserve Bank has reported that it is currently working with registered banks to collect this information. Statistics NZ will incorporate this additional information to increase the coverage of bank funding interest rates in the PPI when it becomes available.

If the level of the foreign currency funding interest rates were higher than the New Zealand dollar currency funding rates, then the existing calculated spread would be too high. While this would influence the level of the calculated "price" of the implicit intermediation service, it is important to note that the PPI measures price movements rather than price levels. Thus the lack of coverage of foreign currency funding rates in the calculation of the spread would only manifest itself in the PPI if the relative movements of the foreign currency funding rates were significantly different from the relative movements of the New Zealand dollar funding rates. Statistics NZ has looked at indicative alternative sources of foreign currency funding rates, and decided to continue to publish the existing index (which does not include foreign currency funding rates) until reliable information on foreign currency funding rates becomes available.

It should also be noted that the New Zealand dollar funding costs exclude the impact of hedging, for example interest rate-swap costs incurred against fixed-rate claims. This is because the PPI is interested in the rates that were contracted to by the parties to financial intermediation transactions. The hedging arrangements, while they will impact on the bottom-line profit of the banks, are considered to be separate transactions.

Price index developments

Statistics NZ began work in 2004 on a progressive redevelopment of PPIs. This involves re-evaluating the items that are priced and the weights that are applied to them. At this stage, the redevelopment applies only to output indexes. New input indexes will be finalised once all the output indexes have been redeveloped.

The following indexes within the agriculture, forestry and fishing index (PPIQ.SUA) has been redeveloped and took effect from the June 2009 quarter:

• Horticulture and fruit growing (PPIQ.SUA01)
• Livestock and cropping farming (PPIQ.SUA02)
• Dairy cattle farming (PPIQ.SUA03)
• Other farming (PPIQ.SUA04).

There have also been redevelopments of the following two indexes:

• Mining (PPIQ.SUB)
• Retail trade (PPIQ.SUG).

For more information, please see the 'Technical notes'.

For technical information contact:
Suchindra Nanayakkara or Lisa-Jane Thomsen
Wellington 04 931 4600
Email: info@stats.govt.nz

Next release ...
Producers Price Index: September 2009 quarter will be released on
16 November 2009.