There is little pressure on the Reserve Bank to raise the Official Cash Rate before December this year at the earliest, after Statistics New Zealand figures released today show inflation is well within the central bank’s target band.
The Consumers Price Index, a general measure of price levels in the economy, rose 0.5% in the March quarter from December, Stats NZ said.
That was in line with market expectations, which had been revised down slightly from 0.6% over the week after Stats NZ’s food prices measure came in lower than forecast on Monday.
The stubbornly high New Zealand dollar is helping the Reserve Bank contain the price levels of imported goods, although pressure on prices is coming from government-mandated forces, such as rising excise taxes on cigarettes.
The Reserve Bank itself had publicly picked 0.7% CPI inflation in the March quarter in its March monetary policy statement. At the time, the Reserve Bank noted the strong currency was helping it contain price inflation, and even said it may consider cutting the OCR if the dollar kept helping it contain price pressures.
The Reserve Bank is tasked with keeping annual medium-term inflation within a 1-3% target band, although is allowed to look through spikes caused by government tax moves, like 2010’s GST hike, or events like oil price shocks.
Annual CPI inflation was 1.6% in the March quarter from the same quarter a year ago, down from 1.8% annual inflation in the December quarter.
The effects of the Canterbury earthquakes are also starting to show through in the figures, with hikes in Earthquake Commission (EQC) levies pushing contributing to an 18% quarterly rise in dwelling insurance prices. EQC levies were hiked on February 1.
Statistics New Zealand also noted rising housing rental prices were being driven by the South Island over the quarter. Annually, while the nationwide general price level of house rentals rose 2.3%, Stats NZ said its measure of rents in Canterbury, the rest of the South Island, and Auckland rose about 3% from a year ago.
High NZ dollar helping
The general price level of tradable goods, which are those imported or which face foreign competition, fell 0.4% in the March quarter, following a 0.9% fall in the December quarter. The last time the tradables measure fell in two consecutive quarters was the December 2008 and March 2009 quarters, Stats NZ said.
Annually, tradable inflation was 0.3%, down from 1.1% in the December quarter. This was the lowest equal (with the September 2010 quarter) annual rise in tradables inflation since a 0.1% fall in the September 2009 quarter.
Non-tradables inflation, which captures government taxes like rates and excise taxes, rose 1.2% over the quarter, following a 0.2% rise in the December quarter. Annually, it was up 2.5%, following the same rise in the December quarter.
Ciggie tax rises
In line with economist expectations, the main driver of March quarter inflation was a 13.5% rise in cigarette and tobacco prices from the December quarter, reflecting a 14.49% rise in excise duty on January 1, 2012.
“Prices were also higher for petrol, rentals for housing, and insurance. These rises were partly countered by price falls for international air fares and overseas package holidays,” Stats NZ prices manager Chris Pike said.
Petrol prices were the second biggest contributor, up 2.3%.
“Petrol prices are now 0.2% below their June 2011 quarter peak,” Pike said.
“The housing and household utilities group rose 0.7%, mainly due to higher rentals for housing (up 0.9%). Higher prices were also recorded for property maintenance (up 1.2%) and purchase of new housing (up 0.7),” Stats NZ said.
Insurance premiums rose 3%, mainly due to higher dwelling insurance prices (up 18%, reflecting increased Earthquake Commission levies),” it said.
The main price fall was for overseas package holidays, down 12%. Prices for overseas package holidays usually fall in March quarters, following rises in December quarters, Stats NZ said.
“International air fares also fell, down 9.2% - they usually fall in March quarters after seasonal peaks in December quarters. International air fares often fall by 8 or 9% in March quarters, and sometimes more,” Pike said.
Annually, the CPI rose 1.6% in the March quarter. Cigarette and tobacco prices increased 13.5%. Prices also rose for petrol (up 3.7), rentals for housing (up 2.3%), and second-hand cars (up 8.9%).
“The main downward contributions for the year to the March 2012 quarter came from lower prices for telecommunication services (down 7.7%), audio-visual equipment (down 18%), and vegetables (down 8.4%),” Stats NZ said.
Economist reactions
ASB economists
The CPI was on our and market expectations, though slightly softer than the RBNZ’s 0.7% forecast in the MPS. Nevertheless, the RBNZ is likely to be a little more wary of future inflation pressures. The RBNZ has a benign view of the inflationary impacts of the impending rebuild of Canterbury, but the rent and construction cost increases over Q1 raise question marks about that view.
One quarter is not a trend, but anecdotes suggest rent increases – particularly in Christchurch – are more than just a blip given the evident tightness in Christchurch and Auckland. Moreover, construction has yet to pick up materially. We will be watching for signs over coming OCR announcements for indications the RBNZ is becoming more nervous about the inflationary consequences of the housing market.
In the short term, the continued strength of the NZ dollar will continue to dominate the RBNZ’s view of risks to the inflation outlook. We expect a soft tone from the RBNZ next Thursday, and still see December as the more likely timing for the RBNZ to start lifting the OCR.
ANZ economists
Q1 CPI rose 0.5 percent, in line with market expectations, but surprising the RBNZ (+0.7 percent) on the downside for the third consecutive quarter. Annual CPI inflation fell to 1.6 percent y/y.
Core measures were subdued, with the weighted median up 0.4 percent and the trimmed mean up 0.5 percent.
The sources of price movements were as anticipated, with non-contestable sectors (in particular tobacco excise taxes) making a significant contribution. Excluding cigarettes and tobacco, the CPI rose only 0.2 percent q/q (1.3 percent y/y).
Our monthly Inflation Gauge has proved to be a very good directional indicator of domestically generated inflation, with the benign readings from the gauge preceding the recent run of downward CPI surprises, and its sharp lift in Q1 reflected in the hefty 1.2 percent rise seen in non-tradable inflation.
With tradable inflation now coming in below RBNZ expectations since the September 2011MPS, we will be closely watching the transmission to inflation expectations, which in turn will impact on non-tradable inflation.
It will take evidence of a more sustained lift in core inflation to trigger OCR hikes, which look some way off.
Westpac economists:
March quarter CPI rose 0.5%, for an annual inflation rate of 1.6%. This was bang-on our expectation, and below the Reserve Bank's forecast of 0.7%.
This confirms our expectation of another dovish OCR review from the Reserve Bank next week. Inflation and activity has surprised the central bank on the downside, while the exchange rate has proved stronger than expected. All three developments argue for low-for-longer on the OCR.
While the inflation outcome was in line with our forecast, the detail was actually surprisingly strong. Hence we will leave our call for a December OCR hike unchanged.
There were two large and surprising falls in prices - books fell 14% and package holidays fell 11%. In neither case is the pace of decline likely to be sustained.
Meanwhile, most of the major categories surprised us on the upside. This suggests that the overall trend in inflation is not as weak as we had anticipated.
First, housing-related inflation has accelerated. Rents rose 0.9%, home ownership rose 0.7%, and property maintenance rose 1.2%. We have long anticipated stronger housing-related inflation in the wake of the Canterbury earthquakes, while the Reserve Bank has tended to believe such pressures would be well contained.
Second, there was less to suggest that the exchange rate was depressing prices this quarter. Back in the December quarter, inflation surprised quite dramatically on the downside as the price of tradable goods fell. At the time, we felt there was a risk that the strong exchange rate was belatedly depressing prices, meaning less OCR restraint would prove necessary. While that risk has not been eliminated, it is less acute than previously thought. Instead, it seems that in December Stats NZ happened to have captured temporary discounts on some items.
Market reaction
No market reaction - which was surprising given that markets seemed to be positioning for a weak number. If anything, our overall assessment is that this is a slight upside surprise.
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