Stats NZ reports annual inflation of 1.4%; quarterly inflation of 0.9% slightly above market and RBNZ forecasts

By Bernard Hickey

Statistics New Zealand has reported the Consumer Price Index rose 0.9% in the September quarter from the June quarter, which was just above market expectations and the Reserve Bank's expectations for quarterly inflation of 0.8%.

Economists said they still expected the Reserve Bank to hold off hiking the Official Cash Rate (OCR) until the March quarter of next year despite inflation being a touch above expectations. The New Zealand dollar intially rose around 20 basis points and two year wholesale interest rates, which are one of the factors driving fixed mortgage rates, rose 4 basis points. The currency later dipped again on reports a deal to lift America's debt ceiling had fallen over.

The quarterly increase compared with a 0.2% rise in the previous quarter and was the strongest quarterly inflation since the June quarter of 2011. Higher petrol (up 5.6%) and vegetable prices (up 20%) were the main drivers and Statistics NZ said the CPI increase in the quarter without those two influences would have been 0.3%.

Regular petrol prices averaged NZ$2.17/litre through the quarter, but were falling towards the end of the quarter. Economists said the unwinding the vegetable price increases and the lower petrol prices would unwind much of that boost in the coming couple of months.

ANZ Senior Economist Mark Smith said the Reserve Bank could wait until next year before tightening monetary policy.

"A low inflation starting point, high NZD, fickle (but improving) global scene, and still high degree of policy traction provide the RBNZ with the option of deploying prudential policy measures and waiting for the external environment to settle before lifting the OCR," Smith said.

Consumer price inflation in the year to the September quarter was 1.4%, which was up from 0.7%  and 0.9% in the previous two quarters and the highest annual inflation rate since the March quarter of 2012. It is also the first time the annual inflation rate has gone back into the Reserve Bank's 1-3% target range since the June quarter of last year.

Local authority rates rose 3.8% in the quarter (although annual increases usually happen in the September quarter), package holidays rose 6.2% and household and utilities costs rose 0.9%. House rentals rose 0.5% in the quarter, with rents rising 1.7% in the quarter in Canterbury and 1.0% in Auckland.

Electricity costs rose 0.6% in the quarter and are up 3.6% for the year, despite flat demand an increased supply of electricity, along with lower wholesale prices.

Westpac Chief Economist Dominick Stephens said annual construction cost inflation was gathering momentum and was now over 4% nationally.

"This is consistent with our long-held view that the Canterbury rebuild will provoke more inflation pressure than the Reserve Bank has allowed for," Stephens said.

He noted residential rents were rising at a slower pace everywhere except Canterbury. "This suggests that the buoyant housing market has more to do with financial factors than physical shortages (except in Canterbury)," he said.

Stephens said the CPI was consistent with his view the burgeoning construction industry and rising house prices would push the economy beyond capacity and generate inflation pressures that required the Reserve Bank to increase interest rates.

"However, this is a slow process. We don't expect the RBNZ to begin hiking the OCR until March 2014, and we don't expect inflation to reach 2% until the end of next year," he said.

"Helpful optics"

JP Morgan Economist Ben Jarman said the result provided some "helpful optics" for the Reserve Bank.

"At least now RBNZ officials will no longer be facing such a dramatic head in the oven, feet in the freezer problem with respect to the activity and housing data vs inflation," Jarman said.

(Updated with more detail, economist reaction, market reaction, charts)