The Consumer Price Index rose 0.6% in the June quarter from the March quarter and was up 1.9% from a year ago, Statistics NZ said. (Adds comment from ASB's Chris Tennent-Brown) A 15% rise in fruit and vegetable prices in June was the biggest contributor to inflation being slightly above the economists' median forecast for a 0.5% quarterly rise, with lettuce prices up 122.8% and tomato prices up 66.7% because of cold weather. However, non tradeable inflation remained high at 0.5% for the quarter and 3.3% for the year. Tradeable inflation was 0.8% for the quarter and 0.2% for the year. Economists said the inflation figures were broadly within expectations and would do little to shift the Reserve Bank from its forecast of keeping the Official Cash Rate at or below 2.5% until late next year. The Reserve Bank is due to announce its latest OCR decision on July 30.
Relatively firm domestic inflation was likely to prevent another cut on July 30, said JP Morgan economist Helen Kevans. While the headline measure is comfortably back within the RBNZ's 1-3% target range, the non-tradable measure is not. Non-tradable inflation, at 3.3%oya, eased considerably but is still hovering above the Bank's target, as it has done since early 2001. This has surprised many given the persistant weakness in the domestic economy, which was in a homegrown recession before the worst of the international troubles unfolded. Given that non-tradable inflation probably will continue to hover at the upper end of the RBNZ's target range in the forseeable future, we see little scope for the RBNZ to ease policy further, particuarly given the economic data (btoh domestic and offshore) have printed on the upside of expectations. We believe that the OCR already has bottomed at 2.5% in the current easing cycle, with the next move to be a rate hike in mid-2010. The risk is, however, that that an OCR hike may be delivered before then, if non-tradables inflation remains elevated throughout 2H09 and the global recovery story continues to gather steam.
ASB economist Chris Tennent-Brown said the RBNZ had forecast a 0.4% rise in its June Monetary Policy Statement.
Given the depth of the current recession, we expect the RBNZ will have some tolerance for inflation printing stronger than its June expectations. Inflation below the target band is a greater concern in the near-term for central banks. Resource constraints are slipping away at a dramatic pace, highlighting that the sustained contraction in the economy will filter through to inflation over time. Most indicators within recent business surveys point to subdued price and cost pressures over 2009. In 2009 the RBNZ will have little need to worry about high inflation, and the economic recovery risks being more muted than the RBNZ's forecast. Inflation below the target bank is a greater concern in the near-term for central banks. The RBNZ expects that CPI inflation will fall through the bottom of the target band, but will then return inside the band and remain there "˜comfortably' throughout the projection horizon. In our view we continue to see strong downside risks to inflation. Our medium-term inflation forecasts are weaker than the RBNZ's, remaining closer to 1% for longer. Inflation pressures are abating rapidly, and inflation expectations are likely to follow. In addition the RBNZ currency projection leaves them vulnerable to further downside surprises on the inflation outlook. We still judge there is some chance of further OCR cuts later in 2009, but increasingly that likelihood rests on when the RBNZ changes its view on the longer-term outlook for the NZ dollar, rather than any surprises in Q2 consumer price inflation.