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Stats NZ says CPI rose 0.3% in Sept qtr and 1.0% in year to Sept qtr; weaker than economists' forecasts of 0.5% for qtr and 1.1% for year

Stats NZ says CPI rose 0.3% in Sept qtr and 1.0% in year to Sept qtr; weaker than economists' forecasts of 0.5% for qtr and 1.1% for year
Stock image/Shutterstock

By Bernard Hickey

Inflation is again proving to be weaker than everyone expected, extending the length of the Reserve Bank's rate hike pause until September 2015 at the earliest.

Statistics New Zealand has reported the Consumer Price Index (CPI) rose 0.3% in the September quarter and was just 1.0% higher for the year to the September quarter, which was weaker than the economist consenus forecast for quarterly inflation of 0.5% and annual inflation of 1.1%. It was also much weaker than the Reserve Bank's own forecast for a 0.7% rise for the quarter.

The weaker than expected inflation figure is viewed as reducing pressure on the Reserve Bank to hike the Official Cash Rate again any time soon. It forced Westpac and ASB to delay their OCR hike forecasts to September 2015 from March and June respectively. Most thought before the CPI figure that the Reserve Bank would hold the OCR at 3.5% until June at the earliest. Now ASB, Westpac and BNZ expect the next rate hike in September, while ANZ thinks it will not be until Decmeber next year.

The New Zealand dollar dropped half a US cent in late morning trade to NZ$78.7 USc and is down around a cent from late yesterday as investors look at the prospects for low interest rates for longer, which makes the New Zealand currency relatively less attractive than others where interest rates are also stable but much closer to 0%.

"The Reserve Bank will be very nervous about inflation falling to the very lower limit of its allowable inflation range," said Westpac Chief Economist Dominick Stephens. He later shifted his next OCR hike forecast to September 2015 from June 2015.

"Inflation has consistently surprised on the downside, despite strong economic growth. This has prompted the Reserve Bank to rethink how domestic activity, migration, housing, and the exchange rate affect inflation," he said, pointing to the bank's signal in its September Monetary Policy Statement of "a period of monitoring and assessment," he said.

"With the RBNZ in "inflation watch" mode, and inflation at 1.0%, it is safe to assume that the OCR will not rise for quite some time. We can expect next week's OCR Review to be very dovish."

ANZ Senior Economist Mark Smith said the details in the figures were benign and showed signs of a structural shift lower in inflationary pressure, both globally for reasons such new technology and deleveraging, and locally as microeconomic reforms helped improve productive capacity.

"The bottom line is no imminent need for the OCR to move until late in 2015 and possibly later," Smith said.

Inflation mostly dead

Housing rents and council rates drove much of the increase in the quarter, Statistics New Zealand said. This was the third consecutive quarterly rise for the CPI of 0.3% and the annual inflation figure of 1.0% was down from 1.6% in the June quarter and 1.5% in the March quarter.

“Higher housing-related prices were responsible for about three-quarters of the rise in the CPI this quarter. The rest of the basket was relatively subdued,” Statistics New Zealand prices manager Chris Pike said.

Overall CPI inflation for the quarter would have been less than 0.16% without the increase in rents and rates.

Housing and household utilities prices rose 1.0% in the quarter after local authority rates, which are often increased in September quarter, rose 3.8%.

Household contents and services prices fell 1.3% as prices fell for textiles, furniture, and whiteware. Communication prices fell 1.4% as services costs fell 1.1% and handset costs fell 7.5%.

Transport prices rose 0.1% in the quarter, with a 1.0% rise in petrol prices and a 1.4% rise in international air fares offset by a 1.0% fall in car prices and a drop in warrants of fitness costs because of the change to annual warrants from six monthly warrants.

"Overall food prices were flat, but there was a relatively large fall for bread, with supermarkets discounting some of their own-brand bread to about $1.00," Pike said.

Annual inflation

Housing and household utility costs rose 2.2% for the year and newly built home costs rose 4.8%. Rentals rose 2.2% for the year and electricity costs rose 3.7%, while cigarette and tobacco prices rose 11.6% because of higher excise duties imposed in January.

Audio-visual and computing equipment prices fell 9.8% for the year.

Tradeable prices fell 1.0% for the year, while non-tradeable rose 2.5%, reflecting price rises for cigarettes and tobacco, rentals for housing, purchase of newly built housing, and electricity.

Economic and political reaction

Westpac Chief Economist Dominick Stephens

Inflation is likely to remain low for quite some time. Consequently, we now expect the RBNZ will leave the OCR unchanged at 3.5% until September 2015. Next week's OCR preview will express a similar sentiment - the OCR is set to remain on hold for the foreseeable future.

ANZ Senior Economist Mark Smith:

While we are coy about jumping on ‘new paradigm’ band-wagons, we do note that inflationary dynamics do appear to be changing. The CPI report confirms that there is no hurry for the RBNZ to resume OCR increases.

There looks to be more in the "structural" shift story in the evolution of inflationary pressure.  Some reflects global facets (deflationary forces, technology, deleveraging) but also we suspect a stronger potential growth rate across the NZ economy and an uplift in productivity. Add into the mix a more balanced risk profile around the economic outlook, a pretty sound microeconomic agenda (which is helping smooth the edges of inflationary forces from the likes of housing shortages) and an economy that looks set to be operating at close to trend (3%) over the coming year, and catalysts for monetary policy to shift the OCR higher are absent.  

The risk profile is tilting towards a prolonged pause and later resumption of OCR hikes towards the RBNZ’s prescribed 4.5% neutral level, with the timing conditional on the NZD and economic developments, both here and abroad. For now, it feels like more than a year away. We now expect the resumption of rate hikes at the end of 2015, with low CPI outturns until then tying the Reserve Bank’s hands.

ASB Senior Economist Christina Leung:

The 0.3% increase in Q3 CPI was below our, market and RBNZ expectations. The result points to an even more subdued inflation environment than both we and the RBNZ expected, with the surprise across both tradable and non-tradable inflation. Annual inflation is now at the bottom of the RBNZ’s target band, and looks likely to remain around 1% or even slightly below that over the next two quarters.

A number of developments, including the benign inflation environment, have led us to push back our expected timing of when the RBNZ will resume its tightening cycle from March to September 2015. Beyond that, we have another OCR increase pencilled in for March 2016 for an OCR peak of 4% - lower than our expected peak of 4.5% previously.

BNZ Economist Craig Ebert:

Rightly or wrongly today’s data will feed the Reserve Bank’s concerns about chronically over-forecasting CPI inflation while also sustaining the market’s current predilection to write off the idea of any further increase in the Official Cash Rate this cycle, full stop.

The quarterly CPI result dragged annual inflation down to 1.0% – the bottom of the Reserve Bank’s 1.0 to 3.0% target band or, more to the point, 1.0% below its 2.0% mid-point. It’s a big miss, and also when considering the Bank was expecting a 1.3% annual outcome, based on the 0.7% advance it estimated for Q3 inflation itself. This continues a tendency of the Reserve Bank’s over recent years of over-forecasting inflation. And so the self-analysis will persist.

We project annual CPI inflation to pick up less aggressively over the next 12-24 months than we did previously. With today’s (soft) Q3 CPI now slotted in, we forecast annual CPI of 1.9% over calendar 2015 and 2.5% over the course of 2016.

This harmonizes with the delayed OCR profile we’ve recently instituted; namely, a next 25 basis point hike in September, followed by hikes in October, December and, finally, March 2016. This would establish an OCR peak in the cycle of 4.50%.

Green Party Co-Leader Metiria Turei:

The Consumer Price Index (CPI) rose just 1.0 percent in the year to September while power prices rose 3.7 percent. Since December 2008, when National took office, power prices have risen 24.6 percent and the CPI has risen 11.8 percent.

"New Zealanders know that our electricity market is not working when power prices have doubled in 15 years, even though demand is flat or falling,” Green Party Co-leader Metiria Turei said today.

“Kiwis have just had a guts-full of price rises when power companies are reporting flat or falling demand for power,” Mrs Turei said.

“The power companies are making exorbitant and ever-increasing profits. In a true market, when sales fall, a company’s profits go down, but in this case they just hike prices regardless and families have no choice but to pay.

“Today, we have energy poverty to the extent that 41,000 families were disconnected because they were unable to pay their power bill last year.

"Something has to change. Excessive electricity prices are a deadweight on our economy, which costs businesses and jobs, and is a drain on strained family budgets that results in cold, underheated houses.”

(Updated with economist and political reaction, market reaction, detail, image, chart)

Consumer price index

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29 Comments

Updated with currency fall and Dominick Stephens' comments.

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Bernard, if rates rise - little joke there - they always rise in Q3. The council financial year starts on July 1. As legislation doesn't really allow for councils to change their minds part way through the year it's always price rise in Q3 and then that's it for another year.

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I see your point and the CPI data supports it to at least some extent. It appears quite common for there to be drops in inflation Q3 to Q4.

 

If that pattern were to hold then 2014 Q4 may show YoY inflation between 0.6% and 0.8%.

 

For what it is worth, Stats NZ will collect most Q4 CPI data mid November.

 

Mid November is near enough now i.e. inflation may currently be well under 1% but we won't know that until late january 2015.

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Its a problem for central banks and governments all across the world. How can you inflate debts away without inflation? The burdent of debt will grow and grow.

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I'd suggest their big worry should be deflation. Then the effective debt is larger and their collapsing tax take will make paying it off doubly hard.

I wonder if its "panic mode" at No1 the Terrace. 

Govn bonds might be come rather attractive if they are paying 4% interest in a deflationary environment, as long as you get your capital back of course.

regards

 

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Natures way of 'cutting the fat'.

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So the OCR rises are killing our economy.

"annual inflation figure of 1.0% was down from 1.6% in the June quarter and 1.5% in the March quarter."

So we have a trend of flat or even dis-inflation exasperated by a too high OCR.

If councils etc are raising by typically 4%? then others must be cutting, so deflation in some sectors? loss of profit? job losses? failing small businesses etc.

So OCR rises will stop, ho hum til 2015?  I mean really?  sounds like dogma and not logic. Maybe with dis-inflation to 1% we should be dropping the OCR?  So we wait for the Dec 1/4 figures in Jan to see? before acting? and probably do nothing.

Dr Wheeler now has a credibility problem looming, sit there and do nothing and risk doing a Sweden and get a huge right hook (and hopefully a boot out of the door) or cut and take a wee one the chin and learn from it as many of his peers across the world have um not done.

What a hard decision, maybe he'll feel he's earning his renumeration.

regards

 

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You can understand Mr Wheeler's near desperation to have the currency drop. For in my view good reasons he won't want to drop interest rates- that would quite possibly just blow foreign funded asset bubbles, have limited effect on other inflation, and blow out the current account further. 

Given the drop in oil prices, and oil's still strong impact on many things, you would expect some key prices to decline in the next 2 quarters. He's a whisker away from failing his target band, let alone the actual target of 2%, and with oil down, that whisker won't take much to disappear.

The currency won't drop just with talking. He will likely have to do something about it, and capital intervention in or out seems the best way to do so.

 

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People are spending all their money on houses, which are not included in the CPI.

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.. it's a scam isn't it ... if house prices were included , the CPI would be so high we'd all be baying for Graeme Wheeler to hike the OCR significantly higher , to staunch inflation ...

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You mean in AKL,WLG,CHCH It would be...........

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... those cities make up the bulk of the nation's housing stock , so yes , their contribution to the inflation figure would be significant ...

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GBH is referring to "Housing Prices" otherwise referenced by the House Price Index

 

You are referring to the cost of a new build

 

Two very different things

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Do you not think that such a strategy would destroy us?

So um no.

Much of NZ wouldnt and isnt be seeing such rises and if the RB was stupid enough to work in the value of the bubble for some places he'd destroy the economy especially in rural places IMHO.

regards

 

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... petrol prices cut by 2 cents this morning .... the fourth cut in two weeks ...

 

Unless we actively stimulate demand for oil based products , the planet will remain awash with stoopid oil ... way more oil than is safe for it ...

 

... drop the taxes on petrol Mr Key , you're a slick operator , you know the form , we gotta get outta this place ...

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I wonder what it will take for the OCR to drop back to where it should be?

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What level is should be? 

Shock, horror! Our pioneering profs then go on to share the revelation that firms have even been known to invest WHEN INTEREST RATES ARE RISING; i.e., when the specific real rate facing each firm (rather than the fairly meaningless, economy-wide aggregate rate observable in the capital market with which it is here being conflated) is therefore NOT estimated to constitute any impediment to the future attainment (or preservation) of profit. Whatever happened to the central bank mantra of the ‘wealth effect’ and its dogma about ‘channels’ of monetary transmission? How could those boorish mechanicals in industry not know they are only to invest when their pecuniary paramounts signal they should, by lowering official interest rates or hoovering up oodles of government securities? Read more

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... it needs to be ratcheted back up to around 5 % , where it should be ...

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Nope...Sweden did that for one and killed their economy.

[ Insult deleted. Unnecessary. Ed ]

regards

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... inappropriate for ad hominum attacks upon your fellow bloggers !

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Capital that trots out every day to earn that unearned return that scarfie rightly finds indefensible, needs to be a lot higher for a given level of lower interest rates to provide the  owner a return commensurate with his or her risk appetite.

So Steven, I hope you are happy supplying the borrowed capital costs of funding the most overpaid senior public service in the modern world.

The lastest RBNZ annual report implies the Governor is collecting NZD 630,000.00 for running the equivalent of a local US post office. And yet the Chairman of the US Federal Reserve  commands a more modest salary of USD 201,700.00    

At a paltry 3.5% OCR, the taxpayer has to stump up NZD 18,000,000.00 to cover the RBNZ Governor's collection and he is one of many expectant claimants on your payroll.

Either way you and I collectively owe capital repayment liabilities and the varying interest service costs. If one is lower the other is higher. I am indifferent since my situation is not associated with selling my labour for return.   

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You want to create a depression and deflation?

Destroy the economy? lose jobs?

 

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.. I take it from your vitriolic responses that you agree with the current worldwide QE rush ; that central banks are curing a GFC created from too much debt and a housing bubble , with much more debt , and new housing bubble ?

 

Not sure if you're in any better shape than me at  being in charge ...

 

.. regards ..

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Bloom puts it in these terms because, when one jurisdiction weakens its exchange rate, another’s gets stronger, making imported goods cheaper. Deflation is a both a consequence of, and contributor to, the global economic slowdown that’s pushing the euro region closer to recession and reducing demand for exports from countries such as China and New Zealand.

http://www.bloomberg.com/news/2014-10-22/currency-wars-evolve-with-goal…

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"Overall food prices were flat, but there was a relatively large fall for bread, with supermarkets discounting some of their own-brand bread to about $1.00," Pike said.

 

I can assure you that prices have not fallen on bread that is edible :-)

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...let them eat cake.

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..let them eat cake.

 

Indeed !!!

According to the Fed's triennial Survey of Consumer Finances, the top 10% of U.S. families are doing just fine, and those in the bottom fifth are essentially being kept afloat by transfer payments; but the inflation-adjusted median family income has shrunk by one-eighth since 2004. Quite simply, middle-class incomes are being gutted.

In essence, despite a zero interest rate policy that mainly helps the wealthy, struggling families with falling incomes ought to take steps to accumulate "considerable assets," as retirees take part-time jobs to make ends meet. Let them eat cake, indeed. Read more

 

The returns to capital have taken those deservedly due to labour and will continue to do so unless voters wish to reward themselves otherwise. Whilst "labour" starves deflation will persist.

 

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Sooo which lever(s) are benig pulled to cause the downward pressue on the CPI? We've seen increases in rates and rents which are apparently proping the CPI up keeping its head above water for now, but pressure down due to reducitons in fuel costs.

Is there a silver lining in terms of local manufacturing, growing and production in that efficiencies in these sectors combined with lower demand (?) is surpressing the prices here - OR is it all to do with the notion that a massive amount of money is going into debt servicing on property, reducing demand so much in the CPI metrics that the supply side is meeting this to retain equilibrium? Whats going to happen very soon with salary/wage reviews with this data, less money to spend on consumables (to live) while compulsory repayments rise?

A delay for raising the OCR till mid/late next year and another sell off of NZD to keep exports in demand, are these the only stops to reverse the CPI slide?

Is there middle ground for all concerned?

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Post peak oil I think inflation targeting is a very dodgy and dangerious undertaking these days.

So I see push inflation and pull inflation.  Push is where materials and energy input increases into making a good simply push its cost up, squeezing ppls pockets in a situation like this rasing the OCR is a double whammy.  Pull is the "old style" inflation where excess money for too few goods caused price incraeses, that is history.

"OR is it all to do with"  I think its extremely complex, so partially yes but not "all"

"reducing demand so much in the CPI metrics that the supply side is meeting this to retain equilibrium"  that is the end effect of the combined factors, yes.

"Whats going to happen very soon with salary/wage reviews with this data, less money to spend on consumables (to live) while compulsory repayments rise?"

Deflation and a recession...housing bubble pop....the only Q is which is going to happen first and cause the others.

"only stops to reverse the CPI slide"  I suspect the OCR is already too high, maybe 1% too high.

"middle ground"  I think there is the correct ground, but frankly too much wedded to dogma is in charge high up to see that arrived at until its too late.

regards

 

 

 

 

 

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