Economists expect the Consumers Price Index to hit levels not seen in years; Reserve Bank not expected to act at this stage

By David Hargreaves

Economists are expecting forthcoming Consumers Price Index figures to show levels of annual inflation not seen for years - levels that will be much higher than the Reserve Bank forecast as recently as February.

The latest CPI figures will be released by Statistics New Zealand on Thursday (April 20) - and it is highly possible they will show annual inflation hitting or exceeding 2% for the first time in over five years.

The RBNZ has a target of achieving 1% to 3% inflation, with a specific aim of hitting the 2% midpoint of that range - but it has been missing its targets for a very long time.

ASB's chief economist Nick Tuffley and economist Kim Mundy are expecting the CPI to be 0.9% for the first quarter of the year - pushing the annual figure up 2.1%.

They cite tight capacity pressures in the construction and services (tourism) sectors, combined with a further lift in petrol prices, a 10% tobacco tax increase and a lift in food prices as key contributors for the rise.

"Despite annual inflation returning to the RBNZ’s 2% target, we caution that part of this lift in inflation is temporary. Higher petrol, food (largely fruit and vegetables) and tobacco prices are transitory and, as a result, we expect inflation to dip again before grinding back up to the midpoint of the inflation target over the medium term.

"The RBNZ itself noted in March’s [Official Cash Rate] statement that inflation is likely to be volatile over the near term. With broader inflation pressures still muted, we expect the RBNZ to leave the OCR unchanged until late 2018."

ANZ senior economist Phil Borkin says he's expecting  a 0.7% quarterly lift in the CPI, to give an annual inflation rate of 1.9%.

"With inflation back at target (or close to it), some may argue that the RBNZ should be shifting from its neutral stance. The figures are certainly expected to print well north of the RBNZ’s February MPS forecast of 0.3% q/q (1.5% y/y). However, we doubt the data will alter the RBNZ’s thinking greatly. The RBNZ was reasonably explicit in March that it is discounting the impact of 'one-offs'," Borkin says.

"For the RBNZ, the far more important issue is whether inflation is going to stabilise around target. And we doubt the rest of the CPI figures will provide a clear answer.

"Our Monthly Inflation Gauge suggests that outside of housing, domestic inflation pressures remain surprisingly benign. We see non-tradable inflation at 0.9% q/q in Q1, but that is really just seasonal, with annual non-tradable inflation ticking down a touch to 2.3%. Deflationary influences from the NZD and global scene should continue to be evident across the non-food and petrol tradable space. In addition to this, the peak impact from earlier petrol price gains is occurring right about now and the food price spike should also start to unwind."

ASB's Tuffley and Mundy say the RBNZ will be relieved to see capacity pressures are picking up, though they are largely confined to the construction and tourism industries.

"Sustained levels of high net migration are supporting demand for construction. And, the recent tourism boom NZ has been enjoying is placing pressure on the accommodation sector. We expect these pressures to continue driving inflation for some time yet. Further, in Q4, we saw some evidence of pricing power returning to retailers and the RBNZ will likely look for more evidence of this.

"On balance, the NZ inflation outlook has undoubtedly lifted in recent months. Further, the recent fall in the NZD will reduce some of the drag from tradable inflation going forward. However, with inflation likely to be volatile in the near term and the ongoing downside risks stemming from global uncertainty, the RBNZ is likely to remain cautious."

ANZ's Borkin sees the 'bias' for inflation from now on being upward but the trajectory will "be a slow grind".

"With the economy increasingly butting up against capacity pressures, domestic inflation should broaden beyond just housing over time. However, we are yet to see firm evidence of this in the labour market (wages) and the housing market is now slowing.

"While the global inflation pulse looks to have turned in pockets, huge uncertainties remain including the commodity cycle (not kicking on), subdued wage setting behaviour globally, and the deflationary influence of technology. If our forecasts prove near accurate, core inflation should be around 2% by Q2 next year, which is when we expect the first OCR hike.

"...So, beyond the ‘headline shock’ of having inflation perhaps with a 2 in front of it (as it certainly feels like a long time since that has occurred), we doubt the numbers are going to shed a great deal of light on the outlook for inflation from here apart from some base effects. And so it is going to leave the RBNZ in a cautious, watchful stance."

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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22 Comments

Okay so we always see a bit of an increase in prices over winter . Food production declines and prices go up , ( Tomatoes seem to go up by spectacular margins to over $10/kg ) .

We use more heating so I guess the power companies increase prices in their complicated pricing formula's , because they can , and not because of any underlying producer price increases feeding through to CPI

I dont believe the the petrol price increase is long term , the US is ramping up production ( again ) and Russia is not part the the OPEC production cut deal , which means prices for crude will be mostly depressed .

The petrol and diesel price is only likely to spike if the Kiwi$ goes south , which does not look likely right now .

I dont understand why construction costs are even mentioned in the CPI discussion , most people I know have not undertaken any construction in the past 5 years , or in our case for over a decade since used a builder .

The CPI isn't an index of your personal inflation, it's meant to be representative for the country, and construction is always happening somewhere. If you were a vegetarian, it wouldn't be argument not to include the price of meat in the CPI.

Tomatoes will have gone up in price as the season has finished, producing them now means expensive heated greenhouses or importing. Simple solution, stop eating them until they're back in season or buy tinned to tide you over.

Or grow tomatoes and bottle them at home.

You miss the point , I am not complaining about tomatoes , just making an observation ..

Given many people only ever buy a house once or twice in a lifetime , and most people will never build a house I dont see why construction costs are in the CPI .

The CPI basket should be just that , everyday things that we buy and consume .

If you're concerned about seasonal affects, concentrate on the annual inflation figures. Building a house might be rare but even doing it once in your lifetime will cost you more than you'll ever spend on tomatoes, even at $10/kg. Low frequency but very high cost. Here's a cool visual about the CPI, showing the components. You'll find buying a new house in Housing and household utilities -> Home Ownership. It makes up 4.53% of the index.

http://www.stats.govt.nz/datavisualisation/cpi.html#40

If you'd like a different index, there's a whole load of options here

http://www.stats.govt.nz/browse_for_stats/economic_indicators/prices_ind...

The world is a big place. Even NZ is a reasonable size. There's a possibility of some tomato addict out there somewhere who is right now building their own tiny house......And bizarrely they are mostly building this tiny house with their own or donated labour and materials, yet they insist on buying the freshest tomatoes from the store and buy and eat most of their tomatoes during winter.

I with boatman on this and the headline is a little over the top with the economists only talking 2% or so in any case.
There are so many examples of surplus capacity almost everywhere you look; manufacturing, retail, food energy, minerals, labour. Just reading today that the worlds biggest aluminium producer looks like needing a Chinese Government bailout so they can keep operating - flooding the market with cheap ali in other words. I don't know how long Tiwai point can keep going with Chinese dumping to compete against so maybe some cheap power coming for us. Immigration has kept a lid on pay rises for most of us so it's hard to see significant wage rises generally.

Aluminium prices are rising and Tiwai is profitable again. The chinese are backing off production. No imminent danger of a closure.

World's Biggest Aluminum Producer Faces Default, Warns Of "Dramatic Social Unrest" Without A Beijing Bailout
http://www.zerohedge.com/news/2017-04-16/worlds-biggest-aluminum-produce...

nope, power prices are fixed annually, or for longer periods if you opt to. They don't go up over winter for residential customers, even though the costs do. The only exception is Flick, whose customers pay the wholesale price so they will see an increase over winter usually..

Most people use more power over winter, so their bills go up, but it's the volume increasing rather than the price.

Powershop (Meridian subsidiary) also varies seasonally, as it tracks wholesale prices.All depends on the Fine Print in yer contract....get out the magnifying glass, read the thing and prepare for the odd Surprise.

We have an account where the costs do fluctuate

Then you've chosen to take that risk. If winter prices doubles and you also use more then you will pay more.

Good luck.

Wouldn't it make sense to just switch providers ever 6 month, so in summer you use the spot priced provider, and in winter you use the traditional provider? Or do they lock you into long term contracts,?

We find that even with price fluctuations our annual bill is less with spot price. (We use Paua to the People). We have also found that we can drive our costs down further by using the timer function on our the dishwasher, washing machine and charging laptops and devices over night. We have them come on around 2-3am when electricity is sometimes, almost free. It's a bit more hassle but worth it for us.

I see the Govt is increasing pay for caregivers xc quite substantially; this will be inflationary as all employers will feel pressure to raise wages; it'll underpin rents and house prices ; so if you want inflation, the Govt is leading the way with this spending, and it's not even election time yet.

How else would you suggest that work that is traditionally done by women be valued properly then? It is pretty damned disgusting how they have been paid till now, and just because it might cause a few disruptions does not mean this wrong should not be righted. Perhaps you might have found it more acceptable to bring comparable male dominated work to be paid less to make it more equal.

Did not say it was wrong to do so, but women with nursing and other degrees will want a margin over caregivers for their skills and training, so the point that it will be inflationary stands,

add to that the tweaks to immigration policy

The headline "Economists expect the Consumers Price Index to hit levels not seen in years" together with the image showing the Inflation needle at 100 is a bit over the top. All it means is that inflation will probably, after many, many quarters, be where it is supposed to be

I welcome the inflation, let it come. Disturbing to hear Mr Hosking on ZB berating the fact other unions may now seek to increase their minimum wage such as the retail sector. I am not pro-union however unless wages in this country rise significantly to reduce the poor ratio we have now with house affordability then we surely we inevitably risk a crash. You cant have it both ways, Mr Hosking. Either the wages rise or the bubble you so soundly denounce with burst shortly.