November 22, 2022

Business Price Inflation holding steady

Will we see a decline or is inflation here to stay in 2023?

For the September 2022 year, inflation in producers’ input and output prices have remained at levels not seen since the December 2008 year, when the Global Financial Crisis (GFC) hit the world and New Zealand. 

For the September 2022 year, the rate of increase in the Producer Price Index (PPI) Inputs declined from its June 2022 peak to 8.8 percent, while the increase in PPI Outputs dropped for the second quarter from its March 2022 peak to 8.4 percent. In comparison, the Consumers Price Index (CPI) was 7.2 percent for the September 2022 year. Meaning that both producers’ input prices and output prices continued to increase by more than the overall price increases faced by consumers.     

As is shown in the graph, the annual percentage increases in producer price for both outputs and inputs has slightly declined from its peaks. The underlying drivers are still present, including the Russian-Ukrainian war, tail end of the international supply chain disruptions, and domestic wage pressure from tight labour market conditions.   

Source: Statistics New Zealand

Below the headline PPI Input and Output numbers, the increases varied across industries. For PPI Inputs, the three industries with the largest increases in the September 2022 year were Transport (up 15.8 percent), Mining (up 14.4 percent), and Agriculture, forestry, and fishing (up 14.1 percent). At the other end of the scale, industries with the smallest changes in PPI Inputs in the September 2022 year were Electricity and gas (down 8.9 percent), Finance and insurance (up 1.8 percent), and Information media and telecommunications (up 2.5 percent).

For PPI Outputs, the three industries with the largest increases in the September 2022 year were Mining (up 17.9 percent), Manufacturing (up 14.8 percent), and Construction (up 13.1 percent). At the other end of the scale, the industries with the smallest changes in PPI Outputs in the September 2022 year were Electricity and gas (down 6.2 percent), Information and media (up 2.9 percent), and Finance and insurance (up 4.0 percent).

It is clear that specific industries are more effected by international and domestic events and have seen larger input and output price increases.  These industries are Transport, Manufacturing, Mining, Agriculture, forestry, and fishing, and Construction.  While at the same time industries, such as Electricity and gas, Information and media, and Finance and insurance did not have the same level of input and output price inflation. 

What will be the impact on business activity going forward?

Higher input prices, on its own, will not affect business activity. If businesses can pass along the increase in input prices to their customers, they will maintain current business activity levels. This can be seen in the very similar movements between the PPI Inputs and PPI Outputs prices indexes, with output prices slightly lagging input price movements. In general businesses adjust output prices following changes in their input prices.

Overall, the current drivers of business price inflation will remain until at least early 2023, therefore we can expect that business activity in the second half of 2022 and the first half of 2023 will be lower. This will be driven by domestic demand slowing down as the combination of higher prices and higher mortgage rates, reduce the quantity of goods and services New Zealand households are able to purchase.