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.
45 Comments
"Bump the OCR to 12.5 %"
If inflation got high to warrant that level, then that might mean mortgage interest rates of 14-16% p.a and likely to bring house prices to more affordable levels for new owner occupier buyers.
Bank stress testing borrowers at say 17-20% would mean much lower mortgages (2.5- 3.0x debt to gross income)
Of course, there would be other consequences.
As destructive as such a move might seem (12.5%) .... many seem to think that cleaning up the carnage of cheap credit is something 'non participants' should also bear the cost of ....and all Kiwis are paying that price today.... Would throwing the damage cheap credit incurs at the feet of users be such a sin? Those with liquidity to burn got stung big time by pathetic TD rates whilst credit users wrought havoc on RE values.....speculators now expect everyone to rally to their cause....Why? They have an out and that is sell...sell...sell . Weve had the boom ...bring on the BUST! ... Are we capitalists or socialists?...lol
Well...we could have recaptured some of the money that was handed out to property via the Reserve Bank's huge taxpayer-funded stimulus of the market, but there was much mewing about "give landlords back their dignity!" and a party full of property speculators with multi-million dollar conflicts of interest decided that reasonable taxation of property speculators simply would not be tolerable.
"Except there would be a huge wave of mortgage defaults in the meantime. Few homeowners could afford to service a mortgage at those rates"
That's what happened in the late 1980's, early 1990's. Mortgage interest rates rose from 6-7% levels in 1970's to peak at 20% in late 1980's, leading to the recession in early 1990's
https://teara.govt.nz/en/graph/23100/interest-rates-1966-2008
Close relatives had to sell their real estate and had to turn to social housing. They never financially recovered. When they died, their adult children had to pay for their funeral costs as there was insufficient money in their estate. The bank of mum and dad had a net worth that was negative for their adult children, so they started their financial life behind the starting line.
Recent highly leveraged buyers might be facing similar consequences of their choice to buy.
Other countries have had high levels of mortgage defaults in recent years - look at the GFC in 2008 in the US, Ireland, Spain.
I’ll start by saying I appreciate the content and detailed analysis.
I’ll end by saying, to ensure we don’t overcook the goose, rates have to be cut by May at the latest. There’s 12 months lag from then to relief for the NZ economy. If we wait til 2025, and in turn relief in 2026, god help New Zealand.
Same... i think the second RBNZ says rates are dropping and the down cycle is over FOMO will return everywhere.
From what is see of economic indicators only a fragment of people (who are overleveraged) are hurting. No reason to rush, if to drop the OCR at all for a year or so
People seem to forget the inflation figure is an annual average of four quarters.
It will take time until a hard & fast drop quarterly drop averages out to match the target band.
The risk on focussing too much on that band is to shock freeze the economy.
It's NOT the case that FOMO will immediately return if the OCR is cut by .25 or .5%.
It remains expensive to borrow and this will continue to subdue prices but it will raise hope that the worst of inflation is over.
Of course I don't expect any rate cuts anytime soon (not before Q3).
The decision makers of mostly protestant heritage belief in self-flagellation & punishment and will not rest until their OCD is satisfied, the numbers line up and in consequence a significant amount of people suffer.
The lag in OCR through to market rates, through to lending, through housing transactions (60% of all lending) through to those exiting the housing market, through their local hobbies and interests and general costs of living (if even staying in the country) through to the real economy.
The OCR being used as a tool to manage inflation and while focusing so heavily on lending to the one market not accounted for in the CPI basket, that's the urgent change needed to "save" the economy at this point. If the economy can even be saved.
arguably the economy is struggling in a large part because we overbaked the housing market and have drawn too much investment , resources and focus into it. If he current OCR settings are hurting housing the most - and the OCR settings do not seem very high to me by historical standards - then it might be better to leave it there for a long time and force investment and energies into other markets to balance the economy in the mid to long term and take some pain from housing in the short term - it what the economy needs.
Yes but the RBNZ says housing loans have the lowest risk weightings so are cheapest, business lending is more expensive, hence the major banks encourage smaller self employed to leverage up home loans as they are lower rates..... if the RBNZ changed its risk weightings banks would just lend less as they have lost their way with business lending... your way of lending would require a fannae mae and freddy mac style funder... which the banks would view as sunlight to a vampire
The main reason inflation is coming down is that people are being drained dry by extra costs, current interest rates, and food prices which hold back expenditure in general.
in affect the RB caused a mild recession and the lower inflation rate is all smoke and mirrors.
Remember inflation numbers are compounding so this new inflation rate is almost.as bad as the maximum rate reached. And just to confuse the issue, events in the Middle East may likely cause inflation to return with bells on, if the Suez Canal ship route is blocked for much longer.
"Remember inflation numbers are compounding so this new inflation rate is almost.as bad as the maximum rate reached. "
What bollocks! Golly kiwis are bad at maths!
Consider 4 quarters. The first quarter has inflation at 10%, the other three quarters are zero. Beware 'annual' rates - they hide critical facts.
Consider another 4 quarters. Each quarter is 0.8%. The annual is 3.239% (compounded) whereas 4 x 0.8 = 3.2. Is 0.039 - roughly 4 hundredths of a percent - significant? Hardly.
Swaps took 'nothing to see here' stance and didn't even reach recent highs. i.e. the down trend is still in firmly on tract. Ho hum. Hurry up and wait. If the Fed moves soon then the RBNZ won't be able stay the course. Oh well, let the farce continue to the final act.
Hi Dan,
In interest.co.nz's commentary on the inflation figures, can you and your colleagues please be absolutely clear when referencing inflation percentages that the period is clearly identified.
The mixing of 'annual', 'year to xxx', 'quarterly', and 'monthly' results in a less than clear picture of where inflation actually is. This will need clarification (via injection) when quoting sources as direct quotes lose context of what period is under discussion.
One notes that Stats NZ is usually clear on the period and omissions are infrequent. The same can not be said of the general commentariat with the period omitted frequently. This results in the laughable comparison of annual figures with quarterly figures, and even monthly figures. The result is not pretty, nor helpful.
Many thanks.
Market paid experts bet gov and pop cannot afford debt interest and it will be necessary to cut. Also in their interest to get cuts so can borrow to leverage making money unproductively as usual
Meanwhile RB won’t cut for 4-6 months because does not want egg on face when Middle East causes inflation to stay higher longer. Hence the stand off. Copying USA where every few months 10 year starts rising again as experts realise bank won’t give them their free money
All over head of general pop who also take debt to attempt getting leverage in housing. pitiful
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