Consumer price data for the December quarter was welcome news at a headline level with annual inflation now at 4.7%, its lowest rate since June 2021.
Quarterly prices rose at the slowest pace since the inflation crisis kicked off and the number of items in the CPI basket that had falling prices was the highest in three years.
But under the hood, some closely watched measures of underlying inflation pressure were stronger than the Reserve Bank of New Zealand had forecast.
Non-tradable inflation was 5.9% rather than 5.7%, and Statistics NZ’s trimmed mean measure—which excludes largest increases and decreases—was around 5%.
Stats NZ said this indicated that underlying, persistent inflation was higher than the headline increase suggested, although it had fallen from over 5.5% in September.
On Tuesday afternoon, the central bank held a well-attended briefing for analysts explaining some of the technical nuances of its own core inflation model.
This could be a sign that economists are trying to better understand why the Reserve Bank believes interest rates need to stay high, while market traders expect imminent cuts.
RBNZ’s factor and sectoral factor models, released on Wednesday afternoon, both showed a sharp drop in underlying inflation
Monetary policymakers have been warning that global forces will drag inflation closer to the target band, but tamping down the last few percentage points could be hard work.
For example, inflation in the United States has been bouncing just above 3% for the past eight months.
Mark Smith, a senior economist at ASB, said RBNZ will be worried about the same problem occurring here and could choose to keep its policy restrictive as a result.
“Today’s data suggests domestically-generated inflation will take somewhat longer to fall below 3%,” he wrote in a note.
Turning the worm
But Stephen Toplis, head of research at BNZ, said the pace at which inflation is falling should not be overlooked.
“A year earlier, annual inflation was 7.2% which it had averaged across calendar 2022. The worm has most definitely turned, and we think inflation will keep falling relatively quickly for the next few quarters”.
Falling food prices were largely responsible for dragging the inflation rate down in December, as the cost of fresh produce has normalised after storms spoiled supply last summer.
Imported food prices have also been falling, as commodity prices and offshore inflation has softened. Food prices make up almost 19% of CPI and were down 1.2% during the quarter.
Transport costs also dropped 0.7% during the quarter. Vehicle purchase prices were the main driver, but petrol prices helped by holding steady through the quarter.
The big upward pressure came from housing costs, up 0.8%, with rent prices rising 1.1% and construction costs climbing 0.7%.
Miscellaneous goods and services, which includes insurance costs, was up 1.5% and recreation rose 1.1% — likely due to recovery in the tourism sector.
Christmas sales were bigger this year than any other in the past six years, with 16% of all items discounted during the quarter. This number is usually 13% or 14% in December.
The only other time it has been above 16% in the past few years was June 2020, during and after the first nationwide lockdown, when it hit 19%.
Close, but no cigar
Despite the obvious softness in the New Zealand economy, most analysts expect the Reserve Bank to stick with its hawkish stance.
Henry Russell, an economist at ANZ, said the central bank was “winning the war, just not quite as fast as they’d hoped”.
Half of the surprise on non-tradable inflation could be explained by volatility in household energy prices and the data wasn’t likely to prompt a policy change in either direction.
“Despite the higher starting point for non-tradables today, we remain confident that core domestic disinflation will continue over 2024,” he said.
In December, RBNZ Governor Adrian Orr said underlying core inflation was the big challenge ahead.
“The last five yards of the inflation battle are going to be tough,” he told a Parliamentary committee.
Mieneke Perniskie, a trader at Kiwibank, said the market reaction was muted but trending in the direction of higher for longer rates.
The NZ dollar lifted marginally and the two-year swap rate rose seven basis points, suggesting traders had interpreted the CPI release as somewhat supportive of the Reserve Bank’s view.
The RBNZ next reviews the Official Cash Rate, currently at 5.50%, on February 28.
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