Economists expect consumer price index (CPI) inflation to slip to the bottom end of the Reserve Bank’s target band as the Government’s fees-free University policy weighs on spending.
The 'market consensus' is for a 0.5% CPI increase on Thursday – 0.1% lower than the Reserve Bank’s forecast.
This would bring annual inflation to 1.1% – the central bank is mandated to keep CPI between 1-3% with a target of 2%.
Despite this, inflation has only climbed above that target once in the past half-decade.
In this case, the market consensus - taken from a Bloomberg poll of both international economic institutions - shows many of the offshore banks were more hawkish about the expected inflation levels than the Kiwi based banks.
Most bank economists here, however, are more dovish than both the Reserve Bank and market expectations, with ANZ, ASB, Kiwibank and BNZ all picking just a 0.4% increase in the first quarter of the year.
Westpac’s estimates are in line with the market consensus.
“Weighing on inflation in Q1 is the introduction of one year’s free tertiary education,” ASB says in a note.
From the start of the year, all New Zealand students who finished school in 2017, or will finish school during 2018, qualify for a year of free provider-based tertiary education or industry training.
As the fees otherwise paid by the students are being covered by the Government, which wasn’t the case last year, it will register as a price fall in the CPI.
Westpac expects the policy will see 0.2% knocked off the inflation rate this year.
Other areas likely to impact CPI on Thursday are food and fuel prices.
“The inflation that will appear is likely to be driven by cigarettes and tobacco (thanks to the excise tax lift) and it would be a real surprise if the housing and household utilities group didn’t have a substantial impact,” BNZ says.
In a note, the bank says it’s original expectations were for a 0.3% quarter on quarter CPI increase but after seeing Monday’s food price data it notched up its predictions.
“We knew that poor weather was going to push fresh vegetable prices higher but we hadn’t expected the 10.6% increase that occurred in this subgroup.”
ANZ is expecting domestic inflation to nudge back up as the year progresses.
“That is largely predicated on our view that the cyclical low in wage inflation is behind us and that courtesy of both skill shortages and government policy changes, wage inflation will continue to lift.”
But this is far from certain, the bank says.
“Given we see GDP growth in the next year or so running around trend, there is little to suggest that inflation is about to break out any time soon.”