Energy costs cut into profit margins

Rising costs, especially for energy, are putting firms' profit margins under increasing pressure.

Statistics New Zealand's producer price index, released yesterday, recorded a 1.2 per cent increase in output prices in the June quarter but a 2 per cent jump in input prices. Those increases are up from 0.5 and 0.3 per cent respectively in the March quarter.

On an annual basis, input prices rose 4.7 per cent (up from 4.2 per cent in the year to March) while output prices rose 3 per cent (down from 3.2 per cent).

The largest increases in input prices were in the transport sector, hit by higher oil prices, and electricity.

But Deutsche Bank economist Darren Gibbs said the broad-based nature of the rise, with 16 of the 17 industries recording higher quarterly inflation than in March, was potentially worrying for the Reserve Bank. The median increase was 1.4 per cent.

Ten of the 14 groups recorded higher output prices, and the median increase was 0.8 per cent.

Combined with higher labour costs and higher prices for capital goods it meant business costs were rising at the fastest rate for 4 1/2 years, Gibbs said.

ANZ economist Sean Comber said margin compression was to be expected at this stage of the economic cycle.

"It is also encouraging in that it signals competition is placing a cap on the ability of firms to pass on price increases," he said. "A year ago non-labour margins were above their 15-year average and the past year has seen a degree of liposuction."

But he warned that firms' ability to absorb continued pricing pressure could be restrained from here on.

"Seepage" into consumer price inflation seemed inevitable.