Inflation 1.1% in September quarter vs 1% market expectation

Economists are picking the Official Cash Rate will likely remain on hold until March next year after figures released by Statistics New Zealand showed inflation rose 1.1% in the September quarter after a downwardly revised 0.2% rise in the June quarter.

This compared with market expectations of a 1% rise over the quarter and the Reserve Bank's expected 0.9% rise.

"The September quarter rise in consumer prices reflects higher food prices and higher central and local government charges, some of which usually occur at this time of year," Statistics New Zealand's prices manager Chris Pike said.

Inflation in the year to the September quarter was 1.5%, which was the lowest annual rise since the year to March 2004, Stats NZ said. This was down from a revised 1.7% rise in the year to June.

The annual figure remained comfortably in the Reserve Bank of New Zealand's target band of 1%-3% for medium term inflation, and is down from its most recent high of 5.1% in the year to September 2008.

JP Morgan economist Helan Kevans said the inflation figures should mean the RBNZ would not have to raise the Official Cash Rate from 3% until March next year.

"Indeed, with headline inflation comfortably within the RBNZ’s comfort zone, and inflation expectations remaining anchored, there is little urgency for Dr. Bollard to remove the policy accommodation currently in place," Kevans said.

All about expectations

The September quarter CPI figures were the last before the October 1 GST increase, although part of the increase in electricity prices was due to GST charged on electricity consumed in September but invoiced in October.

"The rise in the GST, from 12.5% to 15%, will push headline inflation up significantly in 4Q," Kevans said.

"Our forecast is for headline inflation of 4.6%oya in the current quarter. The risks, though, are skewed to much higher prints if inflation expectations rise, although inflation expectations have so far remained anchored" she said.

"The pass-through to inflation from recent policy changes appears muted, but any ongoing inflationary effect would present a significant challenge for setting monetary policy."

Meanwhile, Westpac economists said the 1.1% quarterly rise largely reflected usual seasonal influences, such as food, local body rates and alcohol excise, as well as the introduction of the Emissions Trading Scheme.

"Annual inflation of 1.5% will not faze the RBNZ, nor will the upcoming spike in inflation due to the GST increase; rather, its concern will be about how ongoing perceptions of inflation respond to this temporary spike," Westpac said in its weekly commentary.

ASB economist Christina Leung said the September figures suggested inflation pressures were picking up, but that the RBNZ should be comfortable holding until March despite the CPI coming out higher than it had expected.

"We estimate that excluding the various Government charges, non-tradable inflation would have increased by around 0.9%. This represents a substantial pick-up from the subdued results over the first half of 2010. In addition, the increase in prices is becoming more broad-based. These all suggest a lift in underlying inflation pressures," Leung said.

"Q4 CPI data will be the crucial test of how much businesses have managed to pass on the GST increase on 1st October. We expect this and various Government charges will boost annual headline CPI to over 5% by the middle of 2011. The RBNZ has made the optimistic assumption that in the face of this spike in headline CPI, medium-term inflation expectations will decline over the coming years," she said.

"We expect the RBNZ will become less sanguine about inflation next year, and raise the OCR by 25 basis points in March in order to keep growing inflation pressures in check. But right at this moment, with a few question marks about the resilience of the economic recovery, the RBNZ will be firmly of the view that remaining on hold is appropriate."

Tradable vs non-tradable

Non-tradables inflation, for goods and services that do not face foreign competition, continued to be the dominant force on the overall figure, rising 1.2% over the quarter, up from a 0.6% rise in June.

Annual non-tradeable inflation was 2.5%, the highest annual figure since the year to September 2009 (3%).

Tradables inflation, for goods and services that are imported or are in competition with foreign goods and services either in domestic or foreign markets, rose 0.9% over the quarter, from a revised 0.3% fall in the June quarter.

Annual tradables inflation was 0.3%, down from 1% in the year to June.

Click here for a chart of CPI by groups (alcohol, clothing, health etc.)

Here is the release from Stats NZ:

The consumers price index (CPI) rose 1.1 percent for the September 2010 quarter, Statistics New Zealand said today.

"The September quarter rise in consumer prices reflects higher food prices and higher central and local government charges, some of which usually occur at this time of year," Statistics New Zealand's prices manager Chris Pike said.

The CPI measures the rate of price change of goods and services purchased by households.

The food group rose 2.4 percent in the September 2010 quarter, with higher prices for vegetables (up 19.7 percent) and milk, cheese, and eggs (up 5.2 percent).

The housing and household utilities group rose 1.4 percent, with local authority rates rising 4.4 percent and electricity prices rising 2.8 percent. About one-quarter of the electricity increase was due to retailers charging 15 percent GST on electricity consumed in the September month and invoiced in October.

The alcoholic beverages and tobacco group rose 2.3 percent, reflecting higher cigarette and tobacco prices (up 4.0 percent), and alcoholic beverage prices (up 1.6 percent). Both increases were affected by increases in excise duty.

The transport group rose 1.0 percent with prices for 'other private transport services' up 8.4 percent, influenced by increases in vehicle relicensing and driver licensing fees. Petrol prices fell 1.3 percent.

The CPI rose 1.5 percent for the year to the September 2010 quarter. This annual increase is the lowest since the year to the March 2004 quarter.

In the year to the September 2010 quarter, transport prices rose 3.7 percent, reflecting higher petrol prices (up 5.8 percent). Housing and household utility prices rose 2.4 percent. The most significant downward contribution came from a fall of 24.6 percent for audio-visual equipment, which is the largest annual decrease since the series began in the June 1999 quarter.

Statistics NZ visits 3,000 shops around New Zealand to collect prices for the CPI and check product sizes and features.

(Updates with more Stats NZ detail, link to CPI groups chart, JP Morgan, Westpac, ASB comments)