CPI falls to the bottom of the Reserve Bank’s inflation target, as the Government’s fees-free education policy drags on overall price gains over the quarter

The Government’s fees-free education policy is a major factor behind consumer price index (CPI) prices falling to the very bottom of the Reserve Bank’s inflation target.

Inflation rose 0.5% over the March quarter for an annual increase of 1.1% – putting it at the very bottom of the Reserve Bank’s 1-3% inflation mandate.

This is down from 1.6% in the year-to-December.

But the drop is only expected to be temporary, according to Westpac Senior Economist Michael Gordon.

“We expect that a lower New Zealand dollar will give a boost to tradables prices (or lead to smaller declines) over the rest of this year.

And as the weak inflation through mid-2017 drops out, the year-on-year comparison will become more favourable for the Reserve Bank.”

As expected, tobacco and alcohol, as well as housing and household utilities added the most to the CPI over the quarter but were largely offset by the Government’s fees-free tertiary education policy.

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.

In total, education prices fell 5.6% over the quarter, led by a 16% fall in tertiary and other post-school education prices.

As the fees otherwise paid by the students are being covered by the Government, which wasn’t the case last year, it registered as a price fall in the CPI.

The biggest price increases over the quarter came from alcoholic beverages and tobacco, and housing and household utilities.

The increased excise duty, introduced in January, influenced a 4.5% annual increase in alcohol and tobacco prices, with cigarettes and tobacco alone up 11%.

Nationally, the price of new build houses increased 4.7% in the year to March, led by a 5.8% increase in Auckland and a 4.2% increase in Wellington.

Canterbury, however, saw a 0.4% drop in new build prices.

Westpac was the only local bank whose forecast was correct – KiwiBank, ANZ, ASB and BNZ were all picking a 0.4% quarterly increase for a 1% increase year-on-year.

The market consensus of 0.5% and 1.1% – taken from a Bloomberg poll of both international economic institutions – showed many of the offshore banks were more hawkish about the expected inflation levels than the Kiwi based banks.

Fuel prices up, but not everywhere

Petrol prices were up 5% in the year-to-March, jumping 2.7% in the quarter alone.

The rising price of crude oil and falling exchange rate in the latter half of last year were cited as the main reasons for the increase.

The average price of 91 octane reached $2 in the March quarter – the highest level since December 2014, according to Statistics NZ prices senior manager Paul Pascoe.

He says for several quarters now, petrol prices have moved in different ways in different parts of the country, rather than falling consistently at a national level.

“Since 2013, Wellington and the South Island have typically had larger increases and smaller decreases than the rest of the country,” Pascoe says.

Come July 1, the Government will impose a 10c a litre fuel tax on Auckland motorists.

Minister of Transport Phil Twyford has ruled out expanding that to other regions in the Government’s first term.