Inflation softer than expected

Consumer price index rises 0.1% in Mar quarter and 1.5% over the year; Higher cigarette prices are offset by lower petrol prices; dollar drops sharply

17th Apr 19, 10:59am by Jenée Tibshraeny

The inflation rate was lower than expected by both the market and Reserve Bank (RBNZ) in the March quarter, supporting the case for interest rate cuts.

The consumer price index (CPI) rose 0.1% in the quarter – less than the 0.2% the RBNZ was expecting.

Year-on-year, the CPI was up 1.5% – below the 1.6% forecast by the RBNZ.

The New Zealand dollar dropped sharply, by over half a US cent to just over US67c, on the news. Interest rate swaps fell too; the two-year rate falling 9 basis points to 1.63%. This suggests the market's anticipating a rate cut.

Tobacco tax increases that saw cigarette prices rise 9% in the quarter, made the largest contribution to inflation. Taking this out of the equation, the CPI fell 0.1% in the March quarter.

Offsetting this rise was a significant 7% fall in petrol prices in the quarter. This flowed through the economy, contributing to lower average prices.

It saw the price of tradable goods fall 1.3%.

Meanwhile over the year, tradeables fell 0.4%, with lower prices for telecommunications equipment, audio-visual equipment and purchases of used cars. Higher prices for overseas accommodation, and meat and poultry offset the decrease.

Non-tradeables rose 1.1% in the March quarter, mainly driven by higher prices for cigarettes and rentals (up 0.5%).

Over the year, prices rose 2.8%, with house purchases adding to the above list as the main drivers.

The RBNZ is next due to the review the Official Cash Rate in May. It surprised markets when at its last review it announced its easing bias. Economists will now be figuring out whether the inflation figures reflect any urgency to cut rates.

Consumer prices index

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Source: Statistics NZ

Official cash rates

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Source: RBNZ

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18 Comments

by Advisor | 17th Apr 19, 11:26am 1555457193

An OCR cut will simply further stoke inflation in non-tradeables.
Pumping cheaper credit in an economy already running out of steam is hardly the solution to the structural problems that are keeping inflation and productivity growth muted.

by RickStrauss | 17th Apr 19, 11:49am 1555458541

Indeed, seems like madness to continue doing the same thing over and over when it hasn't worked so far.

by Rumpole | 17th Apr 19, 12:49pm 1555462168

Bankers and politicians are no Einsteins more like Weinsteins.

by Foxglove. | 17th Apr 19, 1:03pm 1555463039

As I remarked a few weeks back, if your motor is sick, cutting the cost of fuel won’t make it run any better. Giving industry, individuals and business in general, encouragement to borrow more is not a healthy or prudent message. Especially when that tune has been playing now for a long long time. On the other side, earning power from savings is now being reduced critically. That means for the elderly, perhaps not making that appointment with the doctor, less heating, less healthy diet, all of which may well impact negatively on our health system can system.

by Advisor | 17th Apr 19, 1:50pm 1555465838

Mohammed El-Erian at Allianz said earlier this month that lower interest rates have for long passed their "use-by date" and no longer deliver economic gains. Further easing would boost temporary growth in certain sections of the economy but at the cost of others.
For the better part of a decade, we've tried to solve fiscal problems with monetary solutions.

by Jock Silver | 17th Apr 19, 1:13pm 1555463615

https://www.radionz.co.nz/news/business/387243/soft-inflation-sends-dol…

Calls for an OCR cut by bank economists on the basis of no inflation is dog whistling, plain and simple. Of course bank economists want the OCR cut, they want to increase their bank's lending margins.

by tothepoint - d… | 17th Apr 19, 12:16pm 1555460168

Low inflation and low interest rates - but high employment and robust economic growth.......

NZ economy is doing nicely.

TTP

by J.C. | 17th Apr 19, 12:36pm 1555461413

By "high employment", you mean "low unemployment", which is kind a meaningless headline metric. If economic growth is robust, then income growth would be much stronger. If Australia is any indicator, economies that rely on credit-driven bubbles as a pillar are not guaranteed strong income growth and the squeezing of its middle class.

by gordon | 17th Apr 19, 2:11pm 1555467098

TTP is talking nonsense. The economy is struggling. I have always been open about owning a reasonably big retail business in a regional capital. After 15 years my business partner and I have sold it and we are very relieved to have achieved a sale. Retail has struggled for some time and particularly over the last three months. Company reps who visit us tell us that Auckland is even worse off retail wise than the regions. Our economy is not robust. It is very fragile and where house prices are dropping it will get worse. It is not Labour's fault. It is simply the case that people are feeling vulnerable finances wise and are only spending when they have to. Petrol, food, insurances and rates continue to get more and more expensive and something had to give. If you know your house is dropping in value it does not encourage you to spend unless it is very very necessary.

by waymad | 17th Apr 19, 1:34pm 1555464872

Indeed, Gordon. Comments from one with skin in the game (especially retail, where today's sales are next week's payroll and COGS funder) are worth listening to. The blather from sideliners, partisans and the always-suspect 'statistics' are worth zilch in comparison.

by J.C. | 17th Apr 19, 2:56pm 1555469791

I agree 110%. Those within the retail and FMCG sectors and their supply chains are a superb barometer of the health of the economy.

by Yvil | 17th Apr 19, 6:21pm 1555482108

I have just rejected a full asking price offer for my business on Monday and asked the agent to remove the listing because business is going so well and what would I do with the money from the proceeds of the sale? put it in a term deposit at 3% ? No thanks

by frazz | 18th Apr 19, 8:54am 1555534458

Well that just wasted a lots of peoples time..why did you list it in the first place?

by tothepoint - d… | 17th Apr 19, 8:44pm 1555490650

The plight of retailers is much more to do with the rising cost of rents/leases, new technologies (e.g. on-line sales/purchasing) and auction web-sites (e.g. TradeMe) - than it is to do with the macroeconomy.

I warned a number of friends with retail businesses about this more than a decade ago. Thankfully, most took heed.

Remember: the retail sector is not representative of the NZ economy as a whole - which is performing well.

TTP

by linklater01 | 18th Apr 19, 2:27pm 1555554444

TTP,

As always,your posts bring a smile to my face. Do you really expect anyone to believe that a) over 10 years ago,you knew what was over the horizon for many retailers and b) that people in retail listened and sold out based on your prognostications?

I think your carer needs to adjust your meds.

by edw | 17th Apr 19, 3:12pm 1555470747

time to launch UBI.

by HeavyG | 17th Apr 19, 4:50pm 1555476608

Computer says no cut.

by fat pat | 18th Apr 19, 9:58am 1555538326

If the goal is to create severe poverty and instability in the lower socioeconomic class then a 9% tobacco tax rise really is the way to do it. Bravo.