Statistics NZ's April Selected Price Indexes (SPI) suggest inflation is perhaps not as high as feared yet, economists say, but still well above the Reserve Bank's 1% to 3% target range.
Westpac NZ senior economist Satish Ranchhod says prices were a bit better contained than expected, giving the Reserve Bank (RBNZ) "a little more head room" going into the RBNZ's Official Cash Rate (OCR) review on May 27."
On Friday, Statistics NZ's latest SPI figures showed from March to April, petrol prices jumped 13% while diesel prices increased 37%. Monthly food prices and the stock measure of rental property were flat.
Ranchhod said April's SPI figures were a bit softer than expected. "Much of that surprise was centred on volatile categories, like food and fuel."
With Westpac NZ projecting inflation to hit an annual rate of 4.4% in the June quarter, that does suggest some downside risk, he said. The June quarter consumers price index (CPI) will be released on July 21.
The SPI is a monthly series that features about 47% of the contributors to the CPI, used by the RBNZ as its inflation measure. The RBNZ is tasked with keeping inflation between 1% and 3%.
Ranchhod cautions that; "the full impact of oil price rises through the supply chain is yet to be felt, and a sharp rise in inflation is still on the cards for the middle part of the year".
Consumer caution and subdued demand backdrop
ASB senior economist Mark Smith said price rises had a “cost-driven theme” with sharply higher prices for vehicle fuels and airfares driving the bulk of the increase.”
Electricity prices were also higher, he said.
“What appears to be apparent, however, is that consumer caution and the subdued demand backdrop is having more of a moderating impact on inflation,” Smith said.
“Downward surprises were evident for a number of spending categories including accommodation, food, alcohol and tobacco. Rents were unchanged in April and annual dwelling rental inflation looks to have hit a record low."
'The short-term inflation trajectory is ugly'
"The outlook is incredibly uncertain and there are a number of paths ahead for short-term inflation," Smith said.
Smith said ASB’s central forecasts have annual CPI hitting 4.3% in the June quarter, and ending 2026 at 4%.
However, inflation is unlikely to fall below 3% until mid-2027, Smith said, and that's at the earliest.
“A key uncertainty is how long inflation will hold up, with a tug-o-war currently at play between cost and demand driven influences."
Smith said: “The inflation outlook beyond then is still uncertain. Subdued demand looks to be checking price rises for now, but the short-term inflation trajectory is ugly.”
“The more widespread and long-lasting the cost increase, the greater the odds that they flow through into general wage and price setting.
“Much will depend on whether cost or demand driven influences wins the inflation tug-o-war.”
'Lower inflation than we were anticipating'
BNZ has revised its inflation projection for the June quarter, with its head of research Stephen Toplis saying: “April monthly prices genuinely surprised us. Just about everything revealed lower inflation than we were anticipating. We’ve gone through all the details with a fine tooth comb and made a few adjustments for future months.”
“And the overwhelming conclusion that we’ve reached is that we need to lower our June quarter inflation pick a lot. Consequently, we are now picking prices to rise 1.4% in the quarter, 4.0% for the year. This is 0.5% lower than our previous expectation.”
Toplis noted the April SPI is the final price data the RBNZ will see before its May 27 Monetary Policy Statement.
“Put this alongside a set of medium-term inflation expectations that look well-anchored, and wage growth which shows no sign of acceleration, and it’s difficult to see the Monetary Policy Committee springing into action on May 27. This is a view we held anyway but we feel even more comfortable now.”
'No smoking gun for a rate increase'
Toplis said perhaps the key message from April’s SPI figures was that it provided “no smoking gun for a rate increase”.
When it comes to the OCR, ASB's Smith said hikes still appear to be a matter of when and not if.
“We expect the RBNZ to begin normalising monetary policy settings from July, with hikes in 25 basis point increments and the OCR ending the year at 3.25%. The timing is tricky, and the case can be made for an earlier (May) or later (September) start to OCR hikes.”
Westpac NZ is projecting rate hikes from September and Ranchhod said despite the little bit more head room the RBNZ now has before its May Monetary Policy Statement, "the sharp rise in fuel prices since February means inflation is still on course to rise well above 4% through the middle part of this year".
"Importantly, it will take time for the impact of higher fuel prices to be reflected in other consumer prices and for the related dampening impact economic activity to be seen clearly," he said.
"That leaves the RBNZ walking a tight rope - interest rates will need to rise, but the question is how soon and how quickly?"
What the RBNZ expects
In April, the RBNZ held the OCR at 2.25% and updated its inflation forecast - projecting an annual rate of 4.2% in the June quarter.
The RBNZ’s projection was based on observed higher fuel prices and current futures pricing, which assumed Dubai crude oil prices would drop below US$100 per barrel by the end of June.
As of the March quarter, the CPI was recording an annual rate of inflation of 3.1%.
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