Stats NZ says Consumer Price Index fell 0.3% in March quarter

By Bernard Hickey

Consumer prices fell 0.3% overall in the March quarter and annual inflation remained well below the Reserve Bank's 1-3% target range, meaning the central bank is under no pressure to put up interest rates any time soon.

Excluding the slump in petrol prices over the last year and the jump in tobabcco prices from January because higher taxes, annual inflation ran at 0.6% in the March quarter. The Reserve Bank is entitled to 'look through' these factors when making its judgements about where to set interest rates.

Statistics New Zealand reported the Consumer Price Index fell a seasonally adjusted 0.3% in the March quarter from the December quarter, which was its second consecutive quarterly fall. The deflation was slightly more than the 0.2% consensus forecast for the quarter, although slightly less than the 0.4% forecast by the Reserve Bank.

This dragged inflation for the year to the March quarter to a 16-year low of 0.1% and well below the Reserve Bank's inflation target of 1-3%. It was also the 14th successive annual inflation figure below the 2% middle of the range, which current Governor Graeme Wheeler has pledged to target in his Policy Targets Agreement with the Finance Minister Bill English.

"Today’s CPI report provided few signs of a broadening front of pricing pressure emerging despite a sound economic backdrop and rising annual construction cost inflation," said ANZ Senior Economist Mark Smith.

"That should be encouraging for the RBNZ," he said, noting however the hurdle for a rate cut remained high and his view was that the OCR would remain on hold for a "very extended period."

Economists said tradable inflation (prices driven by overseas prices and the NZ dollar) was lower than expected, but non-tradable inflation was slightly higher than expected, in part because of a rise in Auckland rental inflation. Statistics NZ said Auckland rents rose 0.8% in the March quarter and were 2.8% higher than a year ago, which was up from 0.6% in the December quarter and 2.2% for calendar 2014.

Petrol down, tobacco up, rents up

Statistics New Zealand pointed to an average regular petrol price of NZ$1.79/litre in the March quarter, down from NZ$2.00/litre in the December quarter, and that without petrol prices, the CPI rose 0.3% in the quarter.

However, it also pointed to a 12% rise in cigarette and tobacco prices because of an excise duty increase in January. It said the CPI excluding cigarettes and tobacco fell 0.7%.

Housing rentals rose 0.8% in the quarter, with Canterbury up 1.2% and Auckland up 0.8%.

The CPI rise of 0.1% in the year to March quarter was the smallest annual movement since the September 1999 quarter, when prices fell 0.5% over the year.

Tradable prices fell 2.8% for the year to their lowest level since the June 2009 quarter after petrol prices fell 15% and electronics and computing equipment prices fell 13%.

Non-tradable goods and services prices rose 2.3% for the year, which was the lowest annual increase since the September quarter of 2012.

Housing and household utility prices rose 3.0% for the year, with prices for newly built houses excluding land rising 5.0%. Housing rentals rose 2.3% for the year and electricity prices rose 3.6% for the year.

Annual inflation excluding petrol prices was 1.0%, and the CPI excluding tobacco fell 0.2%. Excluding both petrol and tobacco, which the Reserve Bank is entitled to 'look through' when targeting inflation, annual inflaiton was 0.6%, still well below its 1-3% target band.

Market reaction

The New Zealand dollar gyrated around the result, was but solid above 77 USc by early afternoon trade, having risen from just over 74 USc over the last week and rising slightly this morning in the wake of news of another Chinese monetary policy easing..

ANZ Senior Economist Mark Smith said the details in the inflation data were benign outside of housing and 'cost push' pockets such as Government charges and taxes.

"Inflation looks set to remain low over 2015, but uncertainty over the outlook beyond that is high, with mixed signals and avid debate regarding whether we are in a period of structurally low inflation or simply experiencing an unusual confluence of “shocks”," Smith said.

"At the margin we believe today’s core figures add more weight to the structural thesis (the core numbers are hard to ignore despite non-tradable inflation being stronger), albeit marginally," he said.

"We continue to expect the OCR to remain unchanged for a very extended period."

Specifically from the RBNZ’s perspective, non-tradable inflation (the area over which the RBNZ has the most influence) was stronger than expected, although this appears to be related to tax increases and housing pressures.

ASB Senior Economist Jane Turner said the core measures of inflation remained very weak, although the result would not make the Reserve Bank more 'dovish'.

"However, we still see the risk of the RBNZ cutting rates this year, with the NZD’s strength the most pressing issue," Turner said. ASB later estimated the chance of a cut in 2015 at 25% and that it no longer saw any rate hikes in 2015 and 2016.

She pointed to surprisingly subdued construction cost inflation of 0.8%, including 0.2% in Christchurch and 0.7% in Auckland, which was well the usual quarterly growth rates of 1.0%.

"This is at odds with the very high levels of construction activity and indications over growing capacity constraints," she said, questioning whether the figures under-estimated actual construction cost inflation.

Turner also pointed to an increase in the proportion of items with falling prices in the quarter.

"This indicates, despite pockets of rising inflation pressures (largely related to housing), weak underlying inflation pressures may be starting to spread," she said.

Smith also picked up on the rise in the proportion of discounted items.

"According to the distributional measures 45.4% of surveyed prices rose in Q1, the lowest proportion since 2012Q4. The Q1 outturn also showed that prices for 42.9% of surveyed items fell, the highest proportion since 2012Q4," he said.

"Increasing pressures on surveyed capacity do not appear to be flowing through into generalised price increases. Low annual inflation in the services sector (at +1.4% y/y, a 2012Q3 low) is an indication that wage pressures remain low."

Political reaction

Labour Finance Spokesman Grant Robertson described the figures as a double blow for businesses.

“Prices for their products at home are falling and our dollar is overinflated due to high interest rates, making product prices high and uncompetitive for exporting," Robertson said.

“The Reserve Bank has had to keep the OCR at one of the highest rates in the developed world because it fears pouring petrol on the overheating housing market," he said.

“This has pushed our dollar to overinflated levels, making it much harder for exporters to sell their products overseas. The Reserve Bank would normally be rightly concerned about deflation and consider lowering interest rates. But it will struggle to do that now as any cut in the OCR will add a large dose of fuel to the housing fire," he said.

“This is why the Deputy Governor of the Reserve Bank was so strident in criticism of the Government’s inaction on housing last week. John Key has to take his head out of the sand. It’s time to act."

Commenting after the release of the figures, the Council of Trade Unions (CTU) called for the Reserve Bank to cut the Official Cash Rate.

"Real interest rates (taking account of expected very low inflation) are moving back to their late 2008 levels and higher than they were through most of the earlier 2000s," said CTU economist Bill Rosenberg.

"These are costs for business as well as for home owners. The Reserve Bank Board needs to be challenged to do its job of encouraging more innovative policy or be replaced by a group with more courage," he said.

(Updated with more detail, reaction, chart)