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.
141 Comments
A fillip for the housing market…..
Increased rents and the strengthening prospect of falling interest rates will provide a stimulus for house buyers.
Nonetheless, the housing market will continue to bounce around. As I’ve been saying for a long time now, the recovery road won’t be a straight-line ride.
Travel well, folks! 😄
TTP
High inflation quarter on the other end falling off, lower one coming in. Trend is slowly back up with domestic inflation strong.
Imported inflation to go back up too as oil prices rise and filter into most goods.
Usa economy strong, fed not moving anywhere any time soon.
Andrew Orr between a rock and a hard place and will sit on the same OCR for most of the year.
Yeah, there is plenty happening to keep that domestic inflation rate elevated for some time to come: think insurance premiums, local body rate rises, various giovernment charges and ongoing rental rises to name a few. All the stuff that is pretty resistant to interest rates unfortunately. And as you say, imported inflation may kick up soon too.
The impact of Council rates won't be seen in CPI till the Q3 figures are reported in Q4, but since me you and everybody else know they are on their way, our selling prices will start adjusting before the rates rises take effect.
Insurance is rolling on through the economy, and or course the electricity low user charges increasing (which is the majority of residential connections) will be showing up next quarter if not already included in this quarter.
and we have 11,000 more "work ready" people on Jobseekers than this time last year, and 8,500 more on Health condition or Disability Jobseekers. Expect those numbers to keep increasing as redundancys and cutbacks roll on through.
Orr has a difficult decision ahead, cut to cushion the effect of the recession, or hold to beat inflation.
Domestic inflation won't fall dramatically until we see some restraint on the part of central and local government. Their willingness to increase rates and other fees and charges unchecked is now becoming a big part of domestic inflation. Very hard for monetary policy to counter this.
And let's not forget the oldies with net savings that haven't noticed any effects and have continued spending (e.g. overseas travel) like there's no tomorrow.
(Nor forget the petrol heads that love huge vehicles while helping our balance of payments go backwards. Thanks Simian Brown!)
One of the key issues is that a lot of the domestic inflation is coming from items that are not impacted by higher interest rates (eg they are non-discretionary items that have to be paid regardless of what your mortgage interest rate is). These items include: Council rates, Insurance, Electricity,
My rates have gone up $600 per year, insurance up $550 for the year and I'd imagine similar for my electricity. Mortgage re-fixed last year with a hefty bump. It's definitely affected our discretionary spending, rarely ever get takeaways, eating out is gone and some other minor luxuries have gone.
I guess I'm lucky that we started from a comfortable position to begin with so were able to tighten the belt without major discomfort.
The damage done to the rental market by the last Labour Govt is unprecedented. The hypocrisy of supposedly standing for the poor and vulnerable, whilst implementing policies that penalised the poorest and most vulnerable, is quite spectacular. To quote a recent article in The Australian - “So the previous government spent more, borrowed more, taxed more, hired more bureaucrats and actually delivered worse outcomes. To achieve that combination takes a very unique skill set."
But there is hope on the horizon - anecdotal reports suggest there has been a rise in the number of furnished properties in Queenstown being advertised for rent. This will be the holiday homes being returned to the rental market, either from AirBnB or from being left empty, as the ability to end fixed term tenancies is restored. It looks like all the ski field workers might be able to find housing this ski season.
Neither side of our political spectrum are overly fussed with private home ownership.
Looking at much of the housing currently being consented and built, the state, and state assisted charities feature very highly. This causes a bit of a snowball problem, as the government are the least efficient at construction, driving the rates up for everyone else.
This reads more of feelings than facts though. Rental stock kept rising, seemingly especially as speculative gains weren't so easy to come by.
We acknowledge of course though that many landlords felt they had lost their dignity and lamented that much, even if the Exodus prophesied in the speculator's book of Lamentations failed to materialise.
Rental stock might have kept rising, but the point is that the increases did not keep pace with the absolute number of rentals required to house the population. If 35% of households are renters, then 35% of houses sold or built need to be rentals in order to just keep the status quo. Were investors buying or building 35% of housing? No, they werent. They were about 17% - so half the number required.
did not keep pace with the absolute number of rentals required to house the population
This is a continually repeated narrative, granted we have some living in cars, double bunking, garages, etc, but we are not seeing tent cities, illegal slums etc like much of the world.
We have large numbers of empty (two in my street) and underutilised homes.
Is there a shortage of Ferraris in NZ? No. The fact that most of us can't afford one doesn't translate into a shortage argument.
It's affordability, not a shortage.
Why would you leave a property empty when you can charge $30k a year or more for it? Why own it in the first place, betting on capital gains? And if you get capital gains, they will be taxed as you can't really say you were not doing it for capital gain if you don't rent it.
I don't think that's necessarily true. You're modelling as if all house purchases are a simple flow of new houses, and apportioned into rental or owner-occupier. Reality is much messier as so many sales are existing properties. Imagine if we played musical houses and all rental owners sold their property to another investor - zero difference to the renter/owner-occupier balance, but rental sales would absolutely dominate the stats.
You're not necessarily wrong, you just haven't gone deep enough to prove what you want to.
The damage done to the rental market by the last Labour Govt is unprecedented. Bollocks
So why are rents going up? - Stats NZ reported that rents rose 4.7% in the year to March. How many Landlords will drop them this year as mortgage interest can again be claimed......crickets?
Recent analysis suggest quite strongly that rents are related to wages. And rents are only adjusted once a year (and less by many LLs).
Like fixed mortgage rate increases which occur a year or more after the OCR rise, wages & salaries are adjusted annually, likewise rental price increases are annual events. Delayed pay increases, delayed rental increases ... ongoing effects on inflation way after inflation has fallen.
Recent studies on rents has confirmed the relationship between wages and rents.
So if you are trying to claim the removal of interest deductibility as a cause you'd be wrong, i.e. input costs have far less bearing on rents then was previously believed (or believed by far too many).
Higher wages, higher interest rates, higher building costs, healthy homes costs, removal of interest deductibility, and likely a few more. There's a bunch of factors.
But in relation to what KW said, it does seem like the Labour government made changes to the rental market that acted in opposite to the core values (assuming that's improving the fortunes of those worse off).
The cost to rent a state house that's been made healthy needs to increase $400 a week to recoup the costs. Not that it will in that instance (everyone can chip in), but for a private landlord they're going to pass that cost on.
You forgot the ending of no cause evictions that resulted in homes being removed from the rental pool altogether, and the removal of the ability to end a fixed term which resulted in holiday homes being removed from the rental pool. This caused a flow on effect as seasonal workers looking for 6 month tenancies were unable to find any, so were forced into the long term rental market, competing with long term tenants for the same number of properties. So many changes - and every single one of them resulted in higher rents.
Allow me.
The primary finding from our study is that income growth and relative supply and demand of dwellings have been the key drivers of rents in New Zealand over the past 20 year
What Drives Rents in New Zealand? National and Regional Analysis - August 2023 (treasury.govt.nz)
You can keep banging on about trying to find hypocrisy everywhere, but it doesn't detract from the fact that the end user ends up paying for any compliance to keep them "safe", either in higher costs, or less availability.
And is there any end to what we deem "safe"?
Haha that’s true…& new builds should definitely have to meet the new specs…but if I buy an old car that doesn’t have all the safety specs of a new car…but I then demand that it does…I can’t also then have a tantrum in the car yard because this old car is now going to cost a sh*t ton more with all the retrospective work done…new H1 specs are pretty insane really, but hey…can’t change it eh
It's all ok because Nicola said rents were going to increase slower after reintroducing deductibility. Just have to wait for the tax breaks to flow through to the bottom line and for the landlords to then make their adjustments to how much they are going to charge going forward. Just have to wait...
Yes that is how it looks, there is room for increases in the next couple of quarters to still remain under the 3% band or is he now targeting the midpoint.
With Domestic inflation being higher there are the usual items of rates, rent, electricity line charges etc. I wonder how much of the rates and rent increases are driven by higher interest rates for Landlords and Council Debt.
CPI tends to grow somewhat faster in June and September quarters when more annual price increases happen. That's why it's usually looked at on a 12-month basis. Seasonally adjusted, growth in the last two quarters has been at just over 1.5% (3.1% annualised) and that's with the benefit of some helpful fluctuations in oil prices and exchange rates, both of which look likely to reverse in the coming quarter. So it looks to me like underlying inflation is still well over 3% and I wouldn't be surprised if next quarter's headline growth beats 4.0.
Also price increases take time to work their way through the supply chain. So price inflation 6 months ago is yet to still be felt downstream, meaning those price increases will be showing up in the next quarter or two's numbers. A stable 2% forward inflation target will require prior quarters to be a lot lower than what they've been or still are.
Consider the following ...
Back when the RBNZ raised the OCR to 5.5% in May 2023, banks had floating interest rates at about 8.4% about a month later.
Inflation at that time was about 6.6% (which was already falling by the way!)
This gives a 'real interest rate gap' of about 1.8% ... being the float rate of 8.4% less the inflation rate of 6.6%.
Compare that to where we are now. Floating rate at 8.5% and inflation at 4%.
This gives a 'real interest rate gap' of about 4.5% !!!
I.e. the real interest rate is more contractionary now than than it was when the OCR hit 5.5%.
One could conclude the RBNZ should have raised the OCR way HIGHER back in May 2023. But I'd seriously disagree.
What the RBNZ should have done was to have raised the OCR way, way EARLIER. Inflation hit 3.24% in June 2021 (almost a year earlier!) - already out of range - and all indicators pointed to seriously broken supply chains with the added energy shock.
By delaying so long, wage pressures mounted. And we know rents rises are related to wage increase. But rents are only adjusted annually. And sometimes even less i.e. after two or three years. Why anyone is surprised at rent rises now - way after when inflation started up - should not be surprised. And rents are part of non-tradeables. Golly. Who'd have thought a non-tradeable inflation issue would remain for so long, huh?
June 2021 was the time to normalize rates back to pre-covid times and throw in a 0.5% rise above that to nail the point home. So the RBNZ was way, way, way too late.
But where are we now?
Well - if the RBNZ thought a real interest rate of just 1.8% was enough to tame inflation back when inflation was at 6.6% ... Why the hell do they think a real interest rate now of 4.5% is appropriate when inflation is 4.0% and NZ Inc is in Recession and jobs are being lost all over the place?
(Apologies for oversimplifying this but the basic point stands.)
Some Interest.co.nz charts for people to check what I'm saying:
https://www.interest.co.nz/charts/prices/consumer-prices-index2
https://www.interest.co.nz/charts/interest-rates/ocr
https://www.interest.co.nz/charts/interest-rates/fixed-mortgage-rates
Some did, most didn't, and the factors influencing COVID related inflation/response won't be universally felt in exactly the same way.
So it stands as a broad statement, which we can try and find exceptions for, but it doesn't make it any less valid.
It'd be like if I said "eating 10,000 calories a day will likely make you a fatty", and you reply with Ian Thorpe. Most people aren't Olympic swimmers.
Here a thought for you Pa1nter - why don't you address the points in my comment?
If you have nothing to say on a comment, please start your own comment, rather than polluting other peoples' comments with your ill thought out folksie wisdom that veers off into absurdities when challenged?
At 0.6% for the quarter - an ongoing inflation rate at this level would place us comfortably within the 1-3% band this time next year...
however I suspect the Sept Qtr inflation rate will be ugly with Council rates increasing 10-20% across a number of councils, plus warnings that utilites aka, water, electricity, insurance and gas, will also have double digit increases from July onwards.
If this comes to fruition then we may find the September inflation rate will hold us back from dipping into the 1-3% band until very late 2025.
I have. fun fact - number of houses on the market at 492 (as of this morning) is the highest since Nov 2022. The market is starting to have a number of similarities to the 2022 market.
Rents though are high with roughly 58% houses renting for more than $650 a week, it was roughly 40% rentals over $650 back in 2022.
Whenever the inflation issue comes up, we get fixated on the CPI. The be all and end all so to speak. We never discuss monetary inflation - an increase in the broad money supply. We talk about prices going up; but not about all the amount of money in the financial system.
Given that the gold price is now up 100% against the Kiwi peso in 5 years, perhaps it's trying to tell us something. As a proxy, that's an outrageous rate of inflation to suggest at most water cooler congregations. People wouldn't accept it as closer to the real rate of inflation over the CPI.
But what if it is?
Maybe it's just telling us that our money is worth less - i.e. it's been diluted?
But gold has a habit of spiking and then falling. So maybe soon our money will be worth more?
I dunno .... Where's the Big Mac index at?
(Sorry to jest. Your question is a valid one.)
March annual inflation comes in lower than RBNZ and bank economists expected
Annual inflation still came in higher than what the Reserve Bank (RBNZ) was expecting
and
the price increases in the March quarter were the smallest since June 2021
The CPI increased just 0.6% in the March quarter, up from 0.5% in the previous period.
The fact that so much inflation is coming from areas where regulation (e.g. rent, healthcare etc.) and taxation (e.g. alcohol, tobacco etc.) increase prices suggests government will have to do some of the lifting here to reduce inflationary pressure.
We won't get back to low inflation without building more to cap rents for example. Inflationary conditions are no longer benign.
Even if CPI has settled at about 2% annualised, what would you expect the RBNZ to do? If inflation is at target and stable, and your only mandate is the inflation target, wouldn’t you hold interest rates?
Orr has been fiddling with his lever far too much, he needs to give it a rest.
and the drivers of the price rises are local and of which a large part are govt/local body charges - which is pretty much what our inflation rate has looked like for years - even when Orr was dropping rates to the danger zone we still had local inflation above trend "hidden" by imported deflation
He is fundamentally incompetent and I am stunned that he still has the job - ridiculously overpaid as it is
The RBNZ lives in a fantasy world where people ignore the fact that everything they are forced to pay for (food, housing, electricity, insurance, rates, taxes) are going up by 6% a year while the prices of things people can choose not to pay for (overseas holidays, iphones, new cars) are coming down. And in this fantasy world we are all ok with a never ending erosion of our standard of living and increasing poverty and deprivation of essentials.
I wonder if that is indeed true. For example if you earn the min wage for 40 hours a week, you get paid $767.61 a week after tax and can buy 645 loaves of essentials bread a week. Is that less than before?
The real issue is housing costs, but people like yourself don't want that fixed.
I’m sorry K.W. But I don’t think this is true, they (RBNZ) have a very blunt instrument to deal with inflation, which only hits a small portion of the population indebted households, govt departments and businesses. A high proportion of houses in NZ are held mortgage free so they feel no change from increased rates, and changes in interest rates are going to be lagging due to NZers mostly using fixed term mortgages. Interest rates in AU hit the population harder and faster due to much higher rates of floating, and the Federal reserve will be trying to deal with 2.5% 30 year fixed term mortgages gumming up their market for a long time. They are probably very aware of the fantasy world you are describing!
Even if CPI has settled at about 2% annualised, what would you expect the RBNZ to do?
Monitor and do questionable research.
But the reality is that if the CPI settled at 2%, people would accept that inflation is 2%.
But that is unlikely to be the reality because the money supply will need to be increasing to ensure that the economy is not imploding.
So inflation will likely be north of 2%. People say that Japan has gone through a deflationary cycle. This is true, but what people don't know is that Japan's broad money supply has increased by approx 2% pa (per cap) for the past 20 years. That has at least restricted how far prices can fall, particularly for propadee. Comparatively, over the same time period, the rate of increase for the US has been closer to 6% and for the EU closer to 4%.
You should look at Werner's Quantity Theory of Credit. Credit creation for non-productive purposes - consumption and bidding up house prices - is more inflationary than credit creation for productive purposes - the production of goods and services.
Bitcoin has nothing to do with it and is a currency. The difference is that it's not created out of thin air like fiat currency.
"The difference is that it's not created out of thin air like fiat currency." - which makes it deflationary. As more people "use" it, each coin becomes more valuable, which is deflation.
The same thing would apply to a growing economy - if the money supply is constant, then each dollar has to buy more (deflation), otherwise the economy is still worth the same.
OK. That's a fair point. But the fundamental nature of fiat and ratty are different. The former primarily broad money - lent into existence by pvte banks.
And I think you might agree that the relationship between economic growth, inflation, and the money supply could be explained by the Qty Theory of Credit.
No one seems to be talking about consumer prices finally catching up with asset prices.
I like to use the local bakery as an example. If 20 years ago the local baker made a dollar profit per pie, he had to sell 400,000 pies to buy an average Auckland house. Now he has to either sell 1,000,000 pies or he has to increase his profit per pie to $2.50. I think he is just catching on to the latter.
I was talking with some MMT guys about this during the whole QE period. Usually the RBNZ controls the money supply flow into the 'real' economy which impacts prices of everyday goods - more money with the same amount of things means higher prices per thing. This is essentially what they are basing all their decisions on. If it was the only way that money supply in the 'real' economy was manipulated then the RBNZ would have great control over the inflation rate.
However in printing stupid amounts of money most of it flowed into the 'asset' economy, which is not tracked by the RBNZ against inflation targets which means its future effect was ignored. It's like if you pumped loads of water into a river in an attempt to avoid a drought but most of it went into a reservoir that you don't control. It worked because you pumped in shit loads of water but those who controlled the dam gates kept them closed. Now there are loads of people with highly inflated assets that are able to choose to flow their money back into the 'real' economy independently of the RBNZ, in other words they can open and close the gates whenever they like and now we have a downstream flooding problem. This is essentially no different to giving the asset class the same powers of the RBNZ to print money (aka pump water) in terms of actual effect on the 'real' economy, those with inflated assets can choose to increase the money supply in the 'real' economy at any point in time.
In practice this is turning up as boomers realising capital gains (mostly on houses) and continuing to keep up their pre-Covid era lifestyles which is inflationary while the RBNZ is trying to put as much pain into the system to attempt to slow inflation. The most likely outcome seems to be asset prices stagnating with rates higher for longer due to inflation continuing to be untameable. In other words consumer prices will catch up with asset prices at the cost of those without assets having a worse quality of life so that those with assets can maintain their quality of life.
The only alternative is to crash asset prices through more strain on the asset class (driving the need to sell) or hiking interest rates even further to crush demand for assets even further.
In our country you could almost entirely replace the word 'assets' for 'houses'...
SFK
They say that even a broken clock is right twice a day.
I've considered this from multiple angles and I believe they are most likely to be right. So maybe this is Tony Alexander's time to be right too?
https://www.oneroof.co.nz/news/tony-alexander-the-scene-is-slowly-being…
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