In the first quarter, New Zealand’s Producer Price Index (PPI) Inputs rose by 2.9% from the previous quarter, which had seen a decline of 0.9%. Meanwhile, PPI Outputs increased by 2.1% after a small drop of 0.1% before. The biggest increase in outputs came from electricity, gas, water, and waste services, which shot up by 26.2%. Manufacturing outputs went up by 2.3%, and rental, hiring, and real estate services rose by 1.4%. For inputs, there was a significant jump of 49.4% in electricity, gas, water, and waste services. Manufacturing inputs increased by 1.7%, while construction inputs climbed by 0.6%. The PPI measures average prices that producers get for goods and services they sell to businesses or consumers. Rising PPI Outputs may indicate inflation since higher prices might not be passed on to consumers. The PPI Inputs measure what producers pay for raw materials, services, and capital goods. When PPI Inputs increase, it suggests rising production costs, which could lead to higher consumer prices if producers decide to pass those costs on. This data shows a significant shift in producer pricing, with previous declines now replaced by sharp price increases in several areas. The changes in both input and output metrics indicate growing pressures at different production stages, particularly concerning energy costs. The 49.4% jump in utility input costs is unusually high and likely impacts various product chains, not just direct providers. Such rising expenses signal a problem that could affect broader areas of the economy. Manufacturing costs are also rising but at a slower pace of 1.7%. Unlike the more volatile energy costs, manufacturing prices tend to increase steadily. That both input and output prices have risen indicates that producers have less flexibility to absorb these costs. This could mean tighter profit margins if prices don’t stabilize soon. Construction inputs showed only a slight increase of 0.6%. While this is much lower than in other sectors, it still indicates rising costs rather than relief. The gradual increase in framing materials, labor, and raw materials can lead to delayed pressure, especially in housing markets and related finance products. This sector tends to react slowly, so it’s important to monitor it closely. In terms of outputs, beyond the jump in utilities, the 2.3% increase in manufacturing output prices is notable. When output prices rise at the same rate or faster than input prices, it suggests that producers are passing costs further down the supply chain. They may be raising end prices not only due to costs but also in anticipation of further inflation. The supply chain may be adjusting prices for a less favorable cost environment in the future. Hodgson’s earlier remarks about rising output not always leading to higher retail inflation are worth noting. However, the rapid and significant increases this time suggest something more lasting is happening. Price changes are driven by clear input increases rather than vague demand factors, so actions must align with these shifts. We’re not just seeing price adjustments based on future expectations. The current output increases are closely tied to substantial upstream costs, especially from utilities. With this in mind, expect increased short-term price volatility. Instruments sensitive to producer margins may fluctuate more than usual due to uncertain cost pass-through levels. Yield spreads that depend on consistent manufacturing price relationships could also see changes. We should pay close attention to how commodity-linked contracts and energy-intensive derivatives respond in the coming months. From a structural pricing perspective, it’s clear that there’s a significant change. As upstream cost pressures rise, energy input hedging strategies may need to adapt, and break-even levels tied to the manufacturing and utility sectors may be reassessed. While these changes are sharp now, they could still be absorbed, but the focus is more on how quickly and deeply these adjustments occur. Given the current trend, combining shorter-term and longer-term conditional instruments might help balance exposures and avoid over-reliance on any single cost factor. The next few reports will clarify if this is a one-time spike or part of a longer-term trend. Until then, keep your strategy flexible and focus on underlying price mechanics, rather than just surface trends.

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