Statistics NZ reports Consumer Price Index rose 0.3% in March qtr vs market expectations of about 0.5%; Inflation 1.5% in yr to March qtr

By Bernard Hickey

Inflation was softer than expected in the March quarter as the strong New Zealand dollar helped lower car and clothing prices, helping to offset a rise in housing cost inflation, a hike in tobacco taxes and higher council rates.

International airfares and package holiday costs took a seasonal dive in the March quarter, as did vegetable prices.

However, economists said the Reserve Bank was still very likely to hike the Official Cash Rate by a further 0.25% next Thursday and again on June 12 to contain inflationary pressures building later this year and into next year. Some did however caution that the inflation surprise made a fourth rate hike in succession on July 24 less likely.

Statistics New Zealand reported the Consumer Price Index (CPI) rose 0.3% in the March quarter from the December quarter as lower prices for international airfares, vegetables and package holidays dampened the effects of higher tobacco excise and housing costs.

The rise was above the 0.1% seen in the December quarter, but down from 0.9% in the September quarter and was below the median economist forecast for quarterly inflation of 0.5%.

Inflation in the year to March quarter was 1.5%, which was down from 1.6% in the December quarter and marginally above the 1.4% seen in the September quarter. It was also below the median forecast for 1.7% annual inflation.

Cigarette and tobacco prices rose 10.2% in the quarter after an 11.3% rise in excise duties in January, which meant the CPI without cigarettes and tobacco showed no change in the March quarter, Statistics NZ's prices manager Chris Pike said.

Prices for housing and household utilities rose 0.7% in the quarter, reflecting a 1.2% rise in prices for buying newly built houses, rents rising 0.6% and property maintenance rising 1.2%.

International air fares fell 10% in the March quarter after a 12% rise in the December quarter, while vegetable prices fell 5.8% and package holidays fell 5.9%.

Statistics NZ said about half of the 1.5% annual increase in the CPI came from housing and household utility costs, which rose 3.3% for the year.

"The price of buying a newly built house without land increased 5.1%. In Auckland the increase was 5.9% and in Canterbury it was 7.6%," Pike said.

Rents rose 2% for the year, property maintenance rose 4.5%, council rates and related services rose 4.2% and household energy costs rose 2.7%. Insurance costs rose 5.9% for the year.

"The main downward contribution for the year came from cheaper audio-visual and computing equipment (down 10%). There were also lower prices for vehicles (down 3.1%)," Pike said.

"The strong New Zealand dollar has had a downward influence on the retail prices of internationally traded goods, including cars and appliances," he said.

The New Zealand dollar initially dropped 40 basis points to 86.05 USc, but rebounded within half an hour to be down just 10 basis points.

Economist reaction

ASB Chief Economist Nick Tuffley said most of the surprisingly weaker than expected inflation was from tradeable prices, although non-tradeable inflation was also fractionally weaker than expected.

"Key drivers of the weak tradable inflation were imported goods prices (such as clothing, household contents, cars), which suggest that retailers are still facing margin pressure (on top of the NZD impact)," Tuffley said.

"The main inference from the CPI is that tradable inflation is still surprisingly contained.  Despite rising spending and consumer confidence, retailers are struggling to pass on price increases as yet," he said.

"An April OCR increase remains a done deal and is fully priced.  We expect the RBNZ will hike in April, and then wait until July before following up," he said.

Wholesale interest rates for two to four year terms fell around 4 basis points.

Westpac Chief Economist Dominick Stephens said the surprise was entirely from the tradeable sector.

"Lower-than expected inflation will obviously reduce the urgency for the Reserve Bank to hike the OCR. But most of the surprise was on transitory factors. Domestically generated inflation is continuing to gradually rise, and that is the bit that can become persistent if the RBNZ doesn't act," Stephens said.

"So we don't believe that this low inflation print will kibosh the hikes that we had pencilled in for April and June of this year. However, low inflation plus the high exchange rate and falling dairy prices, taken together, have placed a cloud over our forecast for a July OCR hike," he said.

'Where's the rental inflation?'

Stephens also pointed to the fall in rental inflation to 2% for the year.

"The fact that rents are rising so slowly puts paid to the idea that the cause of rising house prices is a shortage of physical supply - if that were really the case, rents ought to be rising too," he said.

ANZ Chief Economist Cameron Bagrie pointed to annual non-tradeable inflation rising to a two and a half year high of 3%, while tradeable prices fell 0.7% for the quarter and 0.6% for the year.

"While annual core and headline inflation is still below the midpoint of the inflation target, the growth and inflation outlook warrants the continued removal of interest rate stimulus. We expect a further two OCR hikes in succession before a pause," Bagrie said.

"Outside of housing and administered price increases, the overall inflation backdrop remains contained," he said.

"Despite the lack of a smoking gun on the immediate inflation front, the strengthening demand backdrop looks set to push annual inflation to around 2% by the end of the year. Despite the stratospheric NZD, we expect the RBNZ to raise the OCR in April and June, with prompt RBNZ action to contribute to a moderate OCR endpoint."

(Updated with more details, reaction)