New Zealand could possibly have just had its biggest quarterly increase in prices for a year - but that's not going to stop the overall picture turning to one of flagging inflation.
While the September quarter Consumer Price Index released by Statistics New Zealand on Wednesday (October 16) could show a 0.6% or even 0.7% rise (the latter figure would make the highest rise since September 2018) the very weak December 2018 and March 2019 quarterly figures (each just a 0.1% rise) could drag the annual rate of inflation below 1.5%, which would be the lowest annual increase in 18 months.
And economists while seeing some short term pricing pressures, see nothing on the horizon that will discourage the Reserve Bank from further cuts to the Official Cash Rate (currently at 1%) in an attempt to stimulate the economy.
The RBNZ itself has a CPI forecast (made in its August Monetary Policy Statement) that is at the low end of market forecasts, namely for 0.5% quarterly inflation and an annual figure of 1.3%.
ANZ chief economist Sharon Zollner and economist Michael Callaghan are forecasting a 0.7% quarterly rise in inflation (1.5% annual) and see some upside risk to that following some surprising strength in the ANZ's most recent Monthly Inflation Gauge.
They say factors driving the 0.7% quarterly rise they are expecting have included:
- Property rates, rents and construction costs continue to support domestic inflation. Property rates rose about 3% in the quarter according to our Monthly Inflation Gauge, a typical September quarter lift. Rental prices rose 0.8% q/q, and construction costs are expected to increase a solid 1.2% q/q. The household and household utilities group is expected to boost CPI inflation by 0.3%pts.
- A surprise lift in food prices provides a boost. Food prices rose 1.3% q/q in the quarter, with strong increases in meat prices and moderate rises in other subgroups. Together, these contribute 0.25%pt.
- Higher road user charges offset a fall in international airfares. Within the transport group, international airfares are expected to post a 4% seasonal decline, while other transport services prices were boosted 8% by a hike in road user charges. Overall, we’ve pencilled in a 0.1% q/q rise for the transport group.
- A seasonal rise in accommodation services and domestic airfares supports non-tradable prices. We’re picking accommodation services to have risen 3% q/q, and domestic airfares to be up 2% q/q. Together these contribute 0.1%pts.
ASB senior economist Mark Smith, who is picking a 0.6% quarterly price rise and 1.4% annual gain, says the tradable/non-tradable inflation split is expected to highlight the offsetting influences on the inflation process.
He says non-tradable prices are expected to lift 0.8% quarter-on-quarter (2.8% year-on-year), supported by higher local authority rates, rising domestic airfares, and solid increases for rents and construction costs.
"Seasonal increase in food prices are expected to deliver a 0.4% qoq rise in Q3 tradable prices (-0.4% yoy). Despite the NZD hovering just above 10-year lows against the USD, there are few signs of an imminent pick-up in tradable prices. The low global inflation backdrop and competitive pressures are expected to cap price increases in the tradable goods sector," he says.
But he says the focus of ASB economists will be on the core inflation measures, which are expected to oscillate around 2% year-on-year.
"Annual inflation from the RBNZ’s sectoral factor model (released Wednesday 16 October at 3pm) has not been above 2% for 10 years. We expect another 1.7% year-on-year print.
"Low readings for core consumer price inflation suggest there is a structural (long-lasting) element to the inflation process," he says.
"The RBNZ remains confident that the economy will respond to the policy stimulus delivered, which should eventually push inflation higher.
"We harbour doubts as to whether the economy will respond with as much vigour. Spare capacity in the NZ labour market and economy in general looks set to increase and this will likely dampen medium-term inflationary pressure. More policy support will be needed to drive inflation higher and we expect a further 50bps of OCR cuts by early 2020."
ANZ's Zollner and Callaghan say taking much signal from the September Quarter inflation figures would be "navigating by looking in the rearview mirror".
"Inflation is a lagging indicator, and recent strength reflects previous stretch in the economy. For the RBNZ, a stronger-than-expected non-tradable inflation print would be unlikely to sway the [Monetary Policy] Committee from a November cut, or the possibility of more cuts into 2020," they say.
They note that annual GDP growth was down to a six-year low of 2.1% year-on-year last quarter, and with growth set to remain subdued, it looks like more slack will open up in the economy.
"More slack means less price pressures ahead, something that the RBNZ will be acutely concerned about, given that inflation expectations are already low. And the outlook for domestic inflationary pressure is getting weaker by the day. Business surveys now confirm that capacity pressures have eased, with a lack of demand increasingly becoming a constraint for firms, with many businesses now expecting to lay off staff after years of reported labour shortages.
"On top of that, cost pressures are moderating and pricing intentions have slumped.
"All up, inflation is likely to continue to fall short of 2% and potential underlying strength in Q3’s inflation print won’t be enough to comfort the RBNZ.
"We expect annual non-tradable inflation to slow over 2020, with headline inflation to remain below 2% out to the end of 2021.
"The RBNZ needs GDP growth to accelerate to achieve a sustained lift in inflation to 2%, and that is looking increasingly unlikely to occur. We’re expecting a 25bp cut in November, and further cuts in February and May to take the OCR to 0.25%.."