Production prices up only 1.5% in quarter

Press, 5 December 1986, Page 2

Production prices up only 1.5% in quarter

By

MARTIN FREETH

in Wellington Production prices in industry rose only 1.5 per cent in the September quarter, supporting the view that consumer price inflation this quarter could be lower when the impact of goods and services tax is removed.

The Statistics Department’s indexes for production input and output prices both increased 1.5 per cent. The former does not include labour cost increases.

Prices paid within industries for the production of food, beverages and tobacco fell more than 2.5 per cent, largely because of downturns in

the markets for some primary produce, notably dairy products.

On the inputs side, producer prices increased slightly more than in the June quarter (1 per cent) but were still much lower than the rises of more than 4 per cent a quarter last year. Input prices are particularly sensitive to exchange rate fluctuations, raising or lowering the costs of imported raw materials.

The exchange rate declined through the September quarter and the low index increases indicate that industries absorbed some higher import costs. The 1.5 per cent output price rise was a significant reduction from previous quarters and is further indication that businesses have absorbed, rather than passed on, higher labour costs incurred from the last wage round. The Minister of Trade and Industry, Mr Caygill, welcomed the result yesterday, claiming it boded well for the December quarter consumers’ price index.

Mr Caygill suggested that producer price movements generally gave an indication of consumer prices in the subsequent period. The last time producer prices rose as slowly as in the 12 months ended September was in the year to June, 1984, under the impact of the wage and price freeze, he said.

In the 12 months to September last year, output producer-price inflation was 14.7 per cent, while consumer-price inflation was 16.3 per cent. In the latest September year, the former was down to 7.2 per cent, and consumer-price inflation, to 11 per cent. The Government hopes an “underlying” inflation rate in the latest quarter will continue to decline, reflecting greater efficiency in production in New Zealand. That rate will ignore the impact of GST, which will take the rise in consumer prices in the quarter up to as much as 10 per cent, according to some forecasts.

Mr Caygill asserted that the producer price indexes pointed to just such an improvement in efficiency.