New Zealand producers felt the pinch in the final three months of 2018 as a spike in electricity prices drove up input costs at twice the pace of the price increases they could pass on to their customers. 

Prices paid by producers, the input producers price index, rose 1.6 percent in the December quarter, driven by a 23 percent increase in the prices paid for electricity and gas, Statistics New Zealand figures show.

Wholesale electricity prices spiked late last year as an outage at the Pohokura oil and gas field coincided with low hydro-lake levels, triggering the highest coal-burn at Genesis Energy’s Huntly power plant in five years. Input prices for petroleum and coal manufacturing also jumped 6.9 percent in the December quarter. 

“The industry hasn’t seen increases of this magnitude since the power crisis of 2008,” business prices manager Sarah Johnson said in a statement.

Most producers weren’t able to pass on the increased energy cost, with output prices received – the output PPI – up 0.8 percent in the quarter. That was mainly due to an 18 percent increase in output prices received by electricity and gas suppliers. 

Manufacturing output prices were down 1.2 percent in the quarter and agriculture, forestry and fishing prices fell 1.8 percent. 

Spark New Zealand was among those that recognised the cost of the power price spike, having recently exposed itself to spot pricing, something managing director Simon Moutter today said had “proven to be not our smartest decision”. The telecommunications company’s electricity bill increased by “high single-digit millions”, chief financial officer David Chalmers told analysts in a profit briefing. 

Telecommunications companies’ margins have been under pressure in recent years as an increasing number of competitors selling retail broadband connections has driven down prices for consumers. Output prices for telecommunications and information media shrank 0.4 percent in the December quarter for an annual decline of 0.9 percent, while input prices rose 1.2 percent for an annual increase of 3.6 percent. 

Producers faced higher input prices for the year, with the input PPI up 4.7 percent, while the output PPI increased 3.6 percent.

The farm price index, also released today, showed farms faced a 4.4 percent increase in input prices in the December quarter from a year earlier, led by a 15 percent jump in the price of fuel. Shearing costs were up almost 12 percent in the quarter and fertiliser prices rose 11 percent.

The capital goods index rose 2.8 percent in December from a year earlier, led by a 12 percent increase in the price of steam generators. 

Business confidence surveys have shown firms are increasingly pessimistic about their profitability this year, with mounting cost pressures and an inability to pass that on to consumers. 

Westpac economists today said they expect the tight labour market to gradually increase the pace of domestic inflation, while a weaker kiwi dollar will make imported goods more expensive. 

They don’t anticipate the pick-up will be enough to trigger higher interest rates by the Reserve Bank, although Westpac economists do see higher inflation over the long term. 

“The RBNZ’s new mandate requires a focus on maximum sustainable employment as well as inflation, suggesting that the RBNZ will be more tolerant of higher inflation outcomes when they do occur,” Westpac economists said in their February economic overview report.

“That could cause inflation to linger at a higher level than otherwise, and in turn lead to a self-fulfilling rise in inflation expectations for businesses and consumers. In the very long term, we see inflation settling at closer to 2.5 percent than 2 percent,” they said. 

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