Inflation in the September quarter came in lower than economists expected, giving Reserve Bank Governor Alan Bollard more time to keep interest rates ‘lower for longer’ ahead of his next Official Cash Rate decision on Thursday.
Figures released by Statistics New Zealand show the Consumers Price Index, a general measure of price changes in goods and services purchased by households, rose 0.4% in the September quarter from the June quarter, lower than economist and Reserve Bank expectations for a 0.7% rise. Economist expectations ranged from 0.4% to 0.8%.
The September quarter rise followed a 1% increase in the CPI in the June quarter, and was the lowest quarterly movement since a 0.2% rise in the June 2010 quarter.
The main contributors to the 0.4% quarterly increase were food prices, up 1.7% from June, and higher local council rates, which rose 4.1%, Statistics New Zealand prices manager Chris Pike said in a release.
Transport prices fell 1% during the quarter, influenced by lower petrol prices (down 3.3%) during the three months. International air fares fell 3.7%, reflecting cheaper flights to Asia, Pike said.
Communication prices fell 3.6% in the September quarter, reflecting increased data caps for broadband plans and cheaper international calling rates, he said.
The New Zealand dollar dropped to 80.39 US cents after the figures were released, from 80.74 cents immediately before.
Room for Bollard
Annual figures show the CPI rose 4.6% in the September quarter from the same quarter a year ago, down from a 21-year high 5.3% annual rise in the June quarter.
The annual figure includes the impact of the GST increase on October 1 last year, which led to general price rises of about 2.2%. The September quarter is the last quarter where the GST hike from 12.5% to 15% will show through in headline inflation figures.
The Reserve Bank is tasked with keeping headline inflation within a 1-3% target band over the medium term, but is allowed to ‘look through’ spikes caused by changes in government taxes such as GST and the Emissions Trading Scheme.
Statistics New Zealand said the CPI would have risen 2.5% on an annual basis if GST had not been increased.
The Reserve Bank is expecting annual inflation to fall to the low-mid 2% range during the next three years.
The Official Cash Rate is currently 2.5%, and economists expect Bollard to keep it on hold when he next reviews the OCR on Thursday at 9 am.
The September quarter CPI was calculated using an updated basket of goods and services, and updated expenditure weights. If the basket had not been updated, the quarterly increase would have been 0.5% in the September quarter, Stats NZ said.
Economist reaction
ASB economist Christina Leung:
The 0.4% increase in Q3 CPI was below our, the RBNZ’s and market expectations. Importantly, there was little sign of a pick-up in non-tradable inflation, which increased only 0.6% in the quarter. This suggests domestic inflation pressures are contained for now. The surprise largely reflected weaker than expected housing and utilities costs, with construction cost inflation relatively muted and property maintenance costs actually declining a fraction. The result is surprising in light of recent business surveys pointing to emerging signs of capacity pressures in the building sector. Meanwhile, household energy costs fell 0.3%, reflecting the increased incidence of prompt-payment discounting.
Tradable inflation was also weaker than expected, largely reflecting declines in international airfares over Q3. The price of recreational goods such as large-screen TVs had been stronger than expected in the previous quarter, suggesting retailers were looking to claw back some of the operating margins lost during the recession. There looks to have been some payback over Q3, with the price declines in the Recreational and Culture group larger than what the recent appreciation in the NZ dollar would suggest.
There are signs insurance costs are picking up, reflecting the effects of the Christchurch earthquakes. Dwelling insurance premiums increased 12.3% in Q3 and home contents premiums increased 5.6% as insurers passed on higher reinsurance costs in the wake of the earthquakes earlier this year. The RBNZ has noted it will overlook the impact of higher insurance costs.
Implications:
The muted extent of housing-related inflation is the material part of the result and gives the RBNZ some added breathing room. After early signs in the June quarter of a post-earthquake lift in construction-related inflation, the September quarter figures were comparatively contained. Given the still-low level of new building activity, including inCanterbury, the RBNZ may get a little more confidence that the pick-up in construction cost inflation will be delayed until sometime next year.
We continue to expect the RBNZ will remain on hold until March next year, commencing then a steady series of 25bp increases. The risks are skewed to a slightly later and/or more staggered tightening cycle. Much depends still on the ability and will of Europe’s politicians to contain their debt crisis, and we expect that process will have a material impact on the RBNZ’s timing.
Westpac chief economist Dominick Stephens:
The September quarter CPI came in well below expectations, rising 0.4% for the quarter and 4.6% on a year ago. The main surprises were some substantial price drops due to greater competition in several industries – this is not a bad thing of course, but it's not necessarily something that will be seen on an ongoing basis.
The largest positive contributions were as expected. Food prices rose 1.7%, with a larger than usual seasonal increase in vegetable prices due to supply constraints after the Queensland floods earlier this year. The annual reset of local body rates saw a 4.1% increase, and other housing-related costs were also higher, with a 0.5% rise in rents and a 0.8% rise in the cost of new houses.
A stronger NZ dollar over the quarter accounted for some of the price declines. Audio-visual and computing equipment fell 4.8% and telco equipment fell 9.2% - both groups are in a major trend decline in prices due to advancing technology, but the stronger NZD hurried them along. Petrol prices fell 3.3% on a combination of the stronger NZD and lower crude oil prices.
The biggest downward surprises were in the non-tradables arena. Electricity prices fell 0.3%, a rare quarterly decline. There has been a campaign encouraging people to switch power companies, which resulted in some suppliers offering better deals such as larger prompt-payment discounts. International airfares fell 3.7% due to increased competition on the routes to Asia. And telecommunication services fell 3.5% reflecting increased data caps for broadband and mobile phone internet packages - effectively a quality-adjusted price decline.
Dwelling insurance rose 12.3% and contents rose 5.6%, the first round of quake-related increases. However, their combined weight in the CPI is just 0.4%.
Alcohol rose just 1.3%, despite a 4.5% increase in excise duty (pegged to annual inflation), suggesting a high degree of discounting.
Market reaction
Financial markets, which had been positioned for a 0.7% outturn, reacted sharply to the surprise. The NZD was down 40 points to 0.8040, and the two-year swap rate fell 6 basis points.
For the RBNZ, the surprise was almost entirely on the non-tradables side, which is considered to be more problematic. Today's result will give the RBNZ more comfort in its forecast that inflation will fall into the lower half of the 1-3% target range next year, once the GST hike and other government charges fall out of the equation. Our pick for the first OCR hike to be in June next year, later than the market median of March, has been strengthened by this result.
(Updates with ASB, Westpac reactions)
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