By Alex Tarrant
The cost of living in New Zealand rose by more than expected during the September quarter, Stats NZ figures show. The consumers price index (CPI) – a broad measure of prices across the economy – rose 0.5% during the three months to September, contributing to a 1.9% annual increase.
These are above median market expectations for a 0.4% quarterly and 1.8% annual rise, and the Reserve Bank’s pick back in August for 0.2% and 1.6%. Economists previewing Tuesday’s figures had said the reading should come in above the RBNZ’s forecast.
Despite annual growth in the cost of new housing falling from June, above-5% growth in nationwide prices kept the upward pressure heaped on, along with food price rises. Meanwhile, dwelling insurance was up a whopping 12% annually, following a 6.1% quarterly rise in September. Local government rate rises were also above the headline CPI.
The numbers come at an interesting time politically, as Kingmaker New Zealand First negotiates with National and Labour over formation of a new government. NZ First MP Shane Jones made a cryptic comment Tuesday morning about policies being faithful to the poor – rises in the prices of essential items like food and housing may add fuel to the fire.
The Reserve Bank is mandated to use monetary policy to keep CPI inflation between a 1% and 3% annual target band over the medium term, with a focus on the 2% mid-point. The Bank tends to place more emphasis on its sectoral model highlighting core inflation pressures. Stats doesn’t publish a core inflation measure, but said its trimmed mean measures – excluding extreme rises and falls – all showed a quarterly change of 0.5%.
The September reading may also be a bitter-sweet farewell for just-retired governor Graeme Wheeler. He faced much criticism during his five-year term as the CPI tracked well below that 2% mid-point; other than the March 2017 quarter’s 2.2% annual reading, the CPI hasn’t been this close to 2% since a 1.8% reading in the year to December 2011.
Economists said that while the reading shouldn't influence the Reserve Bank's late-2019 pick for the next Official Cash Rate hike, some of the commentarty did note that there could now be slightly greater upside risk to an earlier move. The New Zealand dollar rose slightly on the news, although traded largely within the 71 US cent range in the couple of hours after release at 10:45am.
Housing, rents and insurance
Stats NZ said that housing and household utilities prices increased 3.0% over the year to September, with purchase of new housing up 5.4%. This was actually the lowest annual reading for this measure since the March 2016 quarter, and is down from a peak of 6.7% in March 2017.
The cost of newly built houses, excluding land, (Stats doesn’t include existing house sales in the CPI) was up 6.8% in Auckland (down from 8.1% in the year to June), 3.2% in Wellington (vs 3.7%) and 2.6% in Canterbury (vs 3.1%).
Meanwhile, rentals for housing rose 2.2% annually – 2.7% in Auckland, 3.7% in Wellington, and a fall of 1.9% in Canterbury. Local authority rates were up 3.8% nationwide compared to a year earlier.
Food prices also rose faster than the broad CPI reading – up 2.8% over the year, with vegetable prices up 9%. Transport prices were up 2.0%, influenced by higher prices for petrol – up 4.5% over the year (although petrol prices fell 1.7% during the September quarter).
Communications prices were the main downward contributor, down 5.3% over the year, although the decreases for items such as telecommunications services (down 4.5%) and equipment (down 22%) mostly represent continual improvements in quality and capability, Stats NZ said.
Search for tradables inflation proving fruitful
Cigarettes, new housing, rentals and local authority rates kept the pressure on non-tradables inflation – up 2.6% over the year to September and the highest reading since June 2014. Non-tradables relates to domestic goods and services not in competition with international equivalents.
Meanwhile, the Reserve Bank’s search for tradables inflation continued to show positive signs – at 1% positive annual growth (0.9% in June), this built on positive readings in June and March after negative readings in 18 of the past 20 annual quarterly readings back to the year to March 2012.
- The Q3 CPI rose by 0.5% qoq (+1.9% yoy), higher than ourselves, the market and the RBNZ expected.
- Inflation continues to be driven by non-tradable inflation, in particular, higher housing costs.
- Despite the lift in inflation in Q3, we continue to expect the RBNZ to leave the OCR on hold until 2019.
Summary and implications
The CPI rose by 0.5% qoq in Q3, stronger than ourselves, the market and the RBNZ were expecting. On an annual basis, the CPI rose to 1.9%, up from 1.7% in Q2. Despite the stronger than expected result, the underlying story remains unchanged. Higher housing and food costs continue to drive the vast majority of inflation in New Zealand.
Outside of these sectors, there were some subdued signs of life. This was also reflected in the lift in the 10% trimmed mean and weighted median measures, both of which were 2% in Q3. While the RBNZ will be relieved to see underlying inflation being around the mid-point of the target band, it is unlikely to put too much weight on the result at this stage. And the bulk of the difference to the RBNZ’s 0.2% qoq forecast is likely to be accounted for by more recent strength in food and fuel prices.
In particular, the RBNZ is likely to remain cautious given the recent weak out-turns in GDP growth around the start of the year. The economy needs to start firing on all cylinders if we are going to see evidence of sustained price pressures. Further, there remain a number of downside risks lurking in the background, and the composition of the next NZ government is as yet unknown. The RBNZ knows this and, with the luxury of time on its side, is unlikely to respond to this result.
The upside surprise in today’s Q3 CPI result was driven by slightly higher tradable (+0.7%) and non-tradable (+0.2%) inflation than expected. On the non-tradable side of the equation, housing costs were high, as expected. A 3.1% rise in rates, a 0.6% lift in rents and a 1.1% increase in construction costs all combined to lift the housing and household utilities component by 1.0% over the quarter. Interestingly, both rent and construction cost increases were highest in Wellington in Q3. However, on an annual basis, construction costs continue to be most acute in Auckland (+6.8% yoy). Recently, the construction sector has become increasingly capacity constrained and it is no surprise to see prices continuing to respond to high levels of demand.
The tourism sector has also been suffering from growing pains recently and accommodation prices also lifted in Q3. After falling over 8% in Q2, accommodation prices recovered in Q3, lifting by 4.5% over the quarter. There was also evidence of price increases in personal care services and insurance.
On the tradable side of the equation, fuel prices were a drag on inflation, as expected. However, there were a number of upside surprises in the data, including a marginal fall in the cost of new motor cars, despite the NZD strengthening against the yen recently. Household contents and services were also stronger than expected, driven largely by a 1.8% lift in furniture, fittings and floor coverings. This suggests that previous falls in the NZD against the USD meant the currency was less of a drag on inflation over the quarter.
Consumer prices rose 0.5% in the September quarter, in line with our forecast and slightly above the market median. The result was stronger than the 0.2% rise that the Reserve Bank forecast in its August Monetary Policy Statement. However, most of the difference was on the tradables side, which includes relatively volatile items such as food and fuel prices.
For now, inflation sits comfortably in line with the Reserve Bank’s target. However, there is little that suggests a risk of inflation breaking higher, particularly with the New Zealand economy seemingly entering a slower growth phase.
Tradables prices rose 0.2% for the quarter. Food prices rose by 1.1%, with vegetable prices edging back from a previous weather-related spike, but grocery prices picking up. Petrol prices rose strongly during the quarter, but they were still down by 1.7% on average. The disinflationary impact of the strong New Zealand dollar is waning, although the effects on import prices were mixed. Car prices were higher than we expected, but household goods prices were lower than forecast.
Non-tradables prices rose 0.7% for the quarter, a little stronger than we and the RBNZ expected. Looking at the details suggests that the surprise wasn’t widespread, with an element of government charges driving the move higher. Increases in alcohol excise duty, and the fire service levy on insurance premiums, had a larger effect on prices than we had assumed.
The annual inflation rate rose from 1.7% to 1.9%. A range of core inflation measures all told a similar story, with the annual rate either holding steady or ticking slightly higher, and sitting within a range of 1.7% to 2.0%.
The NZD/USD rose 1/3 of a cent on the result. There was no reaction on interest rate markets.
With annual inflation now running at 1.9% yoy, versus the RBNZ's 1.6% yoy forecast today's numbers were a decent upside surprise (albeit probably a pleasant one) compared with the Bank's official view. Today's data outturn in isolation doesn't threaten the RBNZ's outlook that the OCR will remain on hold until at least mid-2019. However, we expect that inflation will also continue to print above the RBNZ's August MPS inflation forecasts for the next few quarters. The RBNZ has forecast inflation to pull back to a rate of 0.7% yoy in the March 2018 quarter before starting to rise again. But based on the capacity pressures we are seeing, combined with a softer NZ dollar, we only see inflation pulling back to a rate of around 1.4% yoy in March 2018 before comfortably rising to around 2% in the second half of 2018. Hitting the magic 2% inflation rate isn't as important as the underlying trend and measures of core inflation - but today's data indicates that these are also showing signs of remaining higher.
The RBNZ recently released a discussion paper which highlights that non-tradable inflation is increasingly being driven by past inflation outturns rather than forward-looking inflation expectations. Based on this analysis, if headline inflation remains comfortably within the RBNZ's 1-3% yoy target band, then non-tradables inflation should track at around 2.5-3% yoy. In addition, a lower NZ dollar should see tradables inflation remain stronger than the RBNZ forecast in August, rising from its current annual pace of 1% yoy. Over the September quarter, the NZ TWI averaged 1.7% lower than the RBNZ's forecasts for the quarter and has also started the December quarter at a weaker level. The impact from a lower NZD on prices typically takes about 1-2 quarters to be fully reflected in tradables prices. We expect to see the RBNZ revise down its NZ TWI outlook in its November MPS and to also revise up its inflation forecasts somewhat. In our view, the current data continues to warrant gradual OCR hikes commencing from late 2018.
The stronger-than-expected inflation data sent both the NZD and trade-weighted exchange rate 20pts higher to $0.7190 and 75.8 respectively. The move follows a quiet overnight trading session.
In terms of local interest rates there was a slight move higher in the yield curve, with the 2-year and 5-year swap rates lifting 1-2pts to 2.21 and 2.71% respectively following the CPI release. Market pricing for an OCR hike remains fully priced for a 25bp hike by November next year, in line with our view.
Some signs of stronger underlying price pressure
The modest strengthening in headline and underlying price pressures in the third quarter don’t dramatically alter the outlook for interest rates, but at the margin they suggest that rates may rise a little bit earlier than the RBNZ’s current suggestion of sometime late in 2019.
The 0.5% q/q rise in consumer prices was in line with the consensus forecast and it raised the annual growth rate from 1.7% to 1.9%. That was higher than the RBNZ’s August forecast of 1.6%, and leaves inflation bang in the centre of the RBNZ’s 1-3% target range. Prices were boosted by a rise in food (+1.1% q/q) more than offsetting a fall in petrol (-1.7% q/q).
Even more encouraging was signs that core or underlying price pressures strengthened a bit. The 0.5% q/q rise in core prices (ex. food and energy) pushed up the annual growth rate from 1.4% to 1.5%. The trimmed mean measure rose from 1.8% to 2.0% and non-tradables inflation increased from 2.4% to a three-year high of 2.6%. This was all mainly due to the boosts from the purchase of new housing (+1.1% q/q), local authority rates (+3.5%), dwellings insurance (+6.1%) more than offsetting a 1.5% q/q drop in phone services and a 5.5% q/q fall in international airfares, as prices returned to normal after the surge in demand for the Lions rugby tour.
Overall, it is encouraging that there are some signs that the rapid rates of economic growth in recent years are starting to boost underlying price pressures. But with signs emerging that GDP growth may be close to a peak, core inflation is unlikely to rise to the midpoint of the 1-3% target.
- Headline inflation was a touch stronger than expected in Q3 at 1.9% y/y.
- Consistent with the signal from our Monthly Inflation Gauge, there were also some tentative signs of domestic prices pressures broadening beyond housing (at a time when perhaps housing-related inflation has peaked).
- However, we are hesitant to overstate the significance of this. With core inflation measures broadly stable, and future inflation signals mixed (especially given a turn in pro-cyclical parts of the economy), we see few implications for the monetary policy outlook.
· Headline CPI rose 0.5% q/q in Q3, which was a touch above consensus expectations. This saw annual inflation lift to 1.9% y/y. Tradable prices rose 0.2% q/q (1.0% y/y), while non-tradable prices rose 0.7% q/q (2.6% y/y). Relative to our own expectations for headline CPI (0.4% q/q), all the surprise was in stronger tradable inflation.
· Some of the more volatile components made broadly offsetting contributions. Food prices rose 1.1% q/q (a 0.2%pt contribution), reflecting higher soft commodity prices more than anything, but also wet weather delaying new-season produce. This was partially offset by a 1.7% q/q drop in petrol prices (-0.1%pts).
· Once again, the housing group made a positive contribution (1.0% q/q; 0.3%pts). Implied construction costs (purchase of housing) rose 1.1% q/q, which is a little softer than the average over the past 12 months. In fact, annual inflation in this component dipped to 5.4% y/y, which is the lowest since Q1 2016. Rental prices rose 0.6% q/q (led by Wellington, interestingly), while energy prices rose 0.3% q/q. The quarter also saw the usual seasonal increase in local authority rates (3.5% q/q).
· Interestingly, there were some tentative signs of domestic price pressures broadening beyond just housing. That is consistent with the signal of our September Monthly Inflation Gauge. Non-tradable inflation excluding housing rose 0.5% q/q (2.2% y/y), which is the largest annual lift since Q2 2014. Non-tradable inflation excluding government charges and tobacco rose 0.8% q/q (2.2% y/y). In seasonally adjusted terms, the lift in non-tradable inflation (0.8% q/q) is the largest in close to four years.
· At this stage, however, we are cautious about overstating its significance. One-offs played a part (eg a 6.1% q/q lift in dwelling insurance, which we suspect is due to the 1 July hike in the Fire Services levy). Central and local government charges rose 1.0% q/q, which is the biggest quarterly jump in three years. Also, we have been in this position before, only for these tentative inflation shoots to wilt. Our caution is heightened at present by our more circumspect views on the near-term economic growth picture.
· Retail-related price moves were a little more mixed this quarter. After two consecutive falls, clothing and footwear prices rose 0.2% q/q. Some bigger-ticket durables prices also bounced (appliances +0.9% q/q and furniture and floor coverings +1.8% q/q). Telecommunication equipment prices were flat after plunging 13% q/q in Q2.
· Overall, core and underlying measures were broadly stable in a 1½-2% range. Headline inflation excluding food, fuel and energy prices rose 0.5% q/q, lifting annual inflation to 1.5% y/y (from 1.4%). The weighted median and trimmed mean measures were both at 2.0% (from 2.0% and 1.8%) respectively. In seasonally adjusted terms, headline CPI rose 0.3% q/q.
· We suspect the RBNZ’s Sectoral Factor Model estimate (out at 3pm today) will remain stable too. Our own estimate has it lifting a touch to 1.5% (from 1.4%). And in terms of the broadness of price increases, we estimate that 43% of the CPI basket is currently experiencing annual price increase over 2% – up a touch from 40% in Q2.