Price index increase bad news on inflation

Press, 2 December 1989, Page 10

Price index increase bad news on inflation

By

PATTRICK SMELLIE

in Wellington

Inflationary expectations were fuelled yesterday by the release of figures showing producers’ prices rose 2.6 per cent in the three months to September. The Opposition spokeswoman on finance, Miss Ruth Richardson, said the figures were a recipe for “stagflation” — where inflation continued in a stagnant economy. A leading indicator of consumer prices, the producers’ price index increase was driven mainly by increases in dairy and meat prices. The September quarter increase was up to 1 per cent higher than many in the financial markets had expected.

While such increases mean New Zealand can expect higher inflation, they also indicate improving prices for some of the

country’s key exports. For the year to September, producers’ input and output prices both showed a 7.7 per cent rise, compared with 6.5 per cent and 6.9 per cent respectively in the year to June. Producers’ price index inputs have been rising steadily on an annual basis since December, 1988, and are seen as likely to underpin higher levels of inflation than the Government would like, given the historic tendency for producer and consumer prices to move in tandem.

The Consumers’ Price Index is the main measure of inflation. However, economists yesterday regarded the factors driving the producers’ price index as more in the nature of “price shocks” than signs of increasing underlying inflation.

The only area where underlying inflation was a problem was

in manufacturing inputs, which appeared to be rising because of the very slow feed-through effect of the weaker New Zealand dollar over the last year. Market speculation was that importers of manufacturing inputs were only now facing the consequences of a lower exchange rate, which raises the price of imports. Most would have had longrunning forward foreign exchange market cover to buffer the impact of devaluation, they said. But this was probably now coming to an end. In addition, higher international inflation was probably now being imported, since the exchange rate was now relatively stable.

There was little evidence of producers expanding their profit margins. Baffling many observers was a

sharp jump in commercial rents. While commercial property remained in over-supply, an economist with the AMP Society, Mr Andrew Bascand, said it was possible rents were rising because of the Budget decision to levy land tax more widely. On the livestock side, Government economists suggested that the combined effect of the East Coast drought and higher international commodity prices had pushed prices higher in the September quarter. “For New Zealanders, this result will dash any hopes they may have of immediate reductions in interest rates,” said Miss Richardson.

The Minister of Finance, Mr Caygill, declined to comment on the producers’ price index. Interest rates barely reacted to the news of the index yesterday because of counterbalancing action from the Reserve Bank.