CPI inflation up 0.8% in March quarter, 4.5% annually due to petrol, cigarettes and food prices; below economists forecasts

By Alex Tarrant

General prices in New Zealand rose 0.8% in the March quarter, due mainly to higher prices for petrol, cigarettes and food than in the December quarter, Statistics New Zealand said today.

The Consumers Price Index (CPI) for the March 2011 quarter also showed general prices were up 4.5% from the same quarter a year ago, Stats NZ said. See our interactive chart below.

The rise in the CPI was below median economist expectations of a 1% increase for the quarter and a 4.7% annual increase. They follow a 2.3% increase in the December quarter due to the rise in GST on October 1 last year from 12.5% to 15%, and an annual increase in December of 4%.

The New Zealand dollar dropped immediately as low as 79.3 USc from 79.85 USc just before the release of the data, but has bounced somewhat to be 79.6 USc by late morning.

The annual increase of 4.5% is the highest for any quarter since September 2008 when petrol prices peaked, although the latest rise included the effects of the GST hike, which raised general prices by 2.22%, Stats NZ said.

Central and local government fees and charges rose 6.8% in the March quarter from a year ago, helping to drive non-tradeable inflation to a record 5.2%.

The Reserve Bank of New Zealand (RBNZ), which is tasked with managing medium-term inflation expectations between 1-3%, had forecast a 4.4% increase in the annual CPI for March. With the headline figure of 4.5% coming in similar to the RBNZ’s expectations, it should do little to change the central bank’s outlook for when it may have to increase the Official Cash Rate (OCR).

Indications are it will look to hold the OCR at its record low of 2.5% for most of 2011, with some economists picking a 25 basis point increase to 2.75% to be delivered on December 8, as inflationary pressures from the rebuilding of Christchurch start to flow through to the wider economy.

The Reserve Bank has previously said it would look through the short-term implications of the GST hike last year.

Three staples? Petrol, ciggies and food

The main contribution to the 0.8% quarterly rise in the CPI came from transport costs, up 2.5% due to higher prices for petrol and diesel, Government Statistician Geoff Bascand said in a media release. Petrol prices rose 9.7% over the quarter.

Cigarette and tobacco prices rose 9.4% over the quarter from December, influenced by a 11.64% rise in excise duty on January 1 this year.

“If prices for petrol, diesel, cigarettes and tobacco had remained unchanged from the December 2010 quarter, he CPI would have risen by 0.1%,” Bascand said.

Food prices rose 1.2%, due to higher prices for grocery food and meat, poultry and fish, Bascand said.

Meanwhile the most significant falls in prices over the quarter came from the recreation and culture subgroup, down 1.7%, and the household contents and services group, down 1.9%, Bascand said.

Add in electricity prices

The annual rise in the CPI of 4.5% included the 2.22% increase in GST last year, Stats NZ said.

Transport costs rose 8.2% over the year, including a 17.1% rise in petrol prices.

Cigarette and tobacco prices rose 26.1%, while electricity prices rose 6%.

“If prices for petrol, diesel, cigarettes and tobacco had remained unchanged from the March 2010 quarter, the CPI would have risen by 3.0% annually,” Bascand said.

Here is the reaction from Labour leader Phil Goff. Also see video above.

Figures showing there has been an annual increase in inflation of 4.5 per cent and the fact it is predicted by some economists to reach the highest level in two decades later this year is proof of this Government’s economic mismanagement, says Labour Leader Phil Goff.

“John Key claims it’s everyone else’s fault that inflation is at a record high. But he was not elected to say there’s nothing much he can do.

“What he has done is fail to lead this country out of the recession. He gave tax cuts to top earners at a time when we could not afford it. His decision to break his promise not to increase GST couldn’t have come at a worse possible time.

“Maybe paying more for essential items isn’t a worry for John Key. But it certainly is for other New Zealanders.

“Three years ago, he was telling Helen Clark as Prime Minister that she should do something about petrol and dairy prices. Well, step up John Key and tell New Zealanders what you are doing now?

“New Zealand now has the worst of all worlds – an economy that has stalled and is probably back in recession. Add to that very high inflation and high unemployment and we’re in real trouble.

“Middle and low income families are suffering as prices of everyday items like milk, cheese, fruit and vegetables, petrol and power soar ahead of wages. That’s not a ‘lifestyle choice’ as John Key claims. It’s a reality for many New Zealanders who cannot afford basic necessities – forget about luxuries.

“Top earners are doing okay though under this Government. They’ve never been better off. But John Key’s generosity to them has not been matched when it comes to middle and low income earners. They’re stretched to the limit.

“Labour will try to ease some of that pressure by eliminating GST on fruit and vegetables. We will also give some financial relief through a tax-free zone and are committed to growing the economy to create better jobs with higher incomes,” said Phil Goff.

Economist reaction

ASB economist Christina Leung said today's figures showed there were tentative signs of a lift in underlying inflation pressures in the economy:

CPI was much weaker than our, and market expectations, increasing only 0.8% in the March quarter. The surprise was in much weaker than expected tradable inflation, which increased only 0.5% in the quarter. Excluding fuel prices, tradable inflation would have fallen 0.9% - even lower than what the high level of the NZ dollar would have suggested. This softer than expected result reflected a substantial amount of discounting in major household items in the face of weak demand. This was particularly evident in lower prices for furniture, audiovisual equipment and second-hand cars over Q1.

Non-tradable inflation increased 1.1%, with the increase in the tobacco excise tax making up 0.4% of this increase. Beyond the increase in tobacco prices, we estimate non-tradable inflation would have only increased 0.7%, suggesting tentative signs of a lift in underlying inflation pressures in the NZ economy.

Nonetheless, the RBNZ will be very comfortable with today’s result, as it is broadly in line with its March MPS forecast of a 0.7% increase for Q1. While weak demand is keeping inflation contained for now, we expect inflation pressures to re-emerge next year as the recovery in the NZ economy picks up pace.

HSBC economist Paul Bloxham also pointed toward signs of increasing inflation pressures showing through in the non-tradable figures:

Kiwi inflation was 4.5% over the year to Q1, a touch weaker than the market expected (4.6%) but a little stronger than RBNZ forecast (4.4%). Headline CPI rose by 0.8% in Q1 (3.2% annualised), which is still above the RBNZ's comfort zone. While some of this will reflect the lagged effect of the GST increase last October, the rise in non-tradables inflation was strong (4.5% annualised). This may be of some concern to the RBNZ given non-tradables inflation is one of the best guides to domestic price pressures. Still expect rates on hold until Q4.

ANZ economists said there were clear upside risks for inflation pressures:

Today’s CPI outturn was in line with the RBNZ’s March MPS pick of a 0.7 percent quarterly increase, but slightly weaker than market expectations. Annual CPI inflation rose to 4.5 percent, the highest rate since September 2008.

Higher petrol prices contributed 0.5 percentage points, and higher tobacco prices a further 0.2 percentage points.

Core measures were a mixed bag.  The weighted median registered a 0.3 percent quarterly increase and service sector inflation rose 0.1 percent. However, the various trimmed means returned quarterly inflation rates in the 0.7 to 0.9 percent range. The soft retail environment is continuing to prevent a broadening of pricing pressure at the retail level, with Statistics NZ reporting that prices for 254 of the approximately 700 individual items collected actually fell in the March quarter.

Our estimate of underlying annual CPI inflation, which excludes the direct impact of GST and “one-off” government charges, rose to 1.8 percent from 1.6 percent last quarter. This remains in the middle of the 1 to 3 percent RBNZ target range but looks to have turned up.

Despite the headline inflation rate being in line with the March MPS projections, future inflation does not look as benign, with clear upside risks. As the year progresses we believe it will become obvious that a 2.5 percent OCR is not sustainable given the inflation outlook.

We continue to look for a 25 basis point hike in the December MPS, with a gradual path of policy tightening thereafter. 

However HSBC economist Helan Kevans said underlying inflation remained benign:

Indeed, underlying inflation remains benign. The trimmed mean measure, which excludes the most extreme 30% of pricemoves, increased just 0.5%q/q in 1Q, providing further evidence that firms remain unable to pass on higher costs owing to weak domestic demand.

There remains, therefore, little urgency for RBNZ Governor Bollard to tighten policy, having only just cut the OCR to a record low in March to stimulate the economy in the aftermath of the recent natural disasters in Christchurch and surrounding areas. Indeed, there is little impulse to remove the current stimulus in place, particularly given the lift from higher energy prices likely will be temporary and considering that inflation expectations have remained anchored despite the rise in the consumption tax. Inflation expectations were steady over the two-year horizon at 2.6%oya in 1Q, while those over one year dropped considerably, falling from 3.4% to 2.9%. Both measures now sit within the RBNZ’s target range.

The details of the CPI report showed that the tradable and non-tradable measures pulled back sharply in 1Q having been lifted in 4Q by the GST increase. Tradables inflation eased back from 2.5%q/q to just 0.5%, but this measure had more to give back given it was affected to a greater extent by the consumption tax increase. Indeed, all the items not subject to GST are in the non-tradable basket. Those items include: housing rentals, school donations, life insurance, and credit services. That all said, if petrol and diesel prices had remained unchanged in 1Q, the tradables component would have fallen0.6%q/q. The non-tradable measure fell back from 2.2% to 1.1% in 1Q, but remained buoyed by higher cigarette and tobacco prices.

(Updated with PM Key's comments on CPI, high NZ$ and low interest rates, economist reaction, video of Goff, Goff reaction statement, interactive chart; drop in NZ dollar; 6.8% rise in government fees and charges)