New Zealand's annual inflation rate dropped to 4% in March, from 4.7% in December, albeit rents, house construction costs and council rates continued rising.
The Consumers Price Index (CPI) increased just 0.6% in the March quarter, up from 0.5% in the previous period.
The CPI measures changes in the prices paid by households for goods and services which provides insight into inflationary trends in NZ’s economy.
Statistics NZ said on Wednesday the price increases in the March quarter were the smallest since June 2021.
“However, they remain above the Reserve Bank of New Zealand’s target range of 1% to 3%,” Stats NZ senior manager Nicola Growden said.
Annual inflation still came in higher than what the Reserve Bank (RBNZ) was expecting as the central bank had forecast annual inflation to decrease to 3.8% in the March quarter.
Westpac and Kiwibank economists had cast 4.2% as their expected annual inflation rate, ASB picked 4.1% while ANZ went for 4% and BNZ came lowest at 3.9%.
The biggest drivers behind the overall headline inflation figure in March were increases in housing and household utility costs.
Rent prices were up 4.7% in the 12 months to March which was higher than the 4.5% in the year ended December.
House construction and rates rose 3.3% and 9.8% respectively.
“Rent prices are increasing at the highest rate since the series was introduced in September 1999,” Growden said.
Stats NZ said the next largest contributor to the annual headline figure were recreation and culture due to a jump in accommodation and items like events, cinema tickets and subscriptions.
International accommodation prices rose 20.8% in the March year which was a big jump from the 6% rise in December.
Cultural services rose 9.7% in March.
Alcohol and tobacco were also a big contributor to annual inflation, with alcoholic beverages up 5% and cigarettes and tobacco up 10.4%.
“The average price of a packet of 25 cigarettes was $54.27 in March 2024,” Growden said. “One cigarette now costs $2.17, while ten years ago they cost 93 cents each.”
Non-tradable inflation above the RBNZ's forecast
Annual non-tradable or domestically driven inflation was at 5.8% in the March quarter – above the RBNZ’s forecast of 5.3% - because of the higher costs from rent, construction and cigarettes and tobacco.
March’s annual inflation was almost as high as the 5.9% annual non-tradable inflation reported in December where construction costs, rental prices, and ready-to-eat food all contributed to the result.
Annual tradable or largely imported inflation, which includes imported goods such as petrol, was 1.6% in March, much lower than the 3% it was sitting at in the previous quarter.
Nonetheless the rise was driven by higher petrol and international accommodation prices. The annual March figure was slightly higher than the RBNZ’s forecast of 1.5% for annual tradable inflation.
Other big increases in items across annual inflation in March were hospital services which rose 13.5% and insurance which has now climbed 14% since March 2023.
Food prices were at 2.4% annually in March, which is a dip from 5.7% in the December quarter.
Inflation last peaked at 7.3% in the June 2022 quarter. The RBNZ has countered the rising inflation by steadily hiking rates since October 2021 with the Official Cash Rate (OCR) currently sitting at 5.50%.
The RBNZ has predicted that headline inflation will drop below 3% in the September quarter of this year.
On the table
As a result of Wednesday’s data release, ASB now thinks the RBNZ will wait until February 2025 to cut the Official Cash Rate (OCR).
ASB senior economist Kim Mundy said the ongoing strength in domestically-generated inflation was evident and would reinforce the RBNZ’s cautious stance.
“The tick higher in annual non-tradable inflation is unlikely to be welcome by the RBNZ,” she said.
Westpac senior economist Satish Ranchhod said the inflation rate coming down will be important for stabilising inflation expectations.
But despite the two-year-long hiking cycle, domestic inflation was still running at rates that were “much higher” than the Monetary Policy Committee is comfortable with, he said.
“And it continues to look ‘sticky’. As a result, rate cuts won’t be on the table in the near term.”
Kiwibank thinks the earliest a rate cut is likely to be on the table is at the RBNZ’s November meeting.
“Today’s print reinforces the downward momentum in inflation we’ve seen to date,” Kiwibank economists Mary Jo Vergara, Jarrod Kerr and Sabrina Delgado said in an economic note.
“We believe inflation is still on track to return to the RBNZ’s 1% to 3% target band in the second half of this year. That’s important because the path for inflation from here is the path for policy.”
Kiwibank now expects inflation to fall below 3% by the September quarter – but it’s not until mid-October that its economists expect to see that in writing.
“That leaves the RBNZ’s November meeting as the earliest date to kick off the next, and long-awaited, phase in monetary policy: rate cuts,” they said.
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