Old school

Last week’s inflation report confirmed that price pressures in New Zealand were subdued in the June quarter, and in fact even softer than expected. While technological change has played some part, the recent weakness in inflation seems to be largely for old-fashioned reasons.

Consumer prices overall were flat in the June quarter, following a surprisingly large 1% increase in the March quarter. That saw the annual inflation rate slow from 2.2% to 1.7%. Both of the last two quarters were affected by what we expect to be temporary factors, so these numbers probably overstate the degree to which inflation has swung around lately. But a broad range of measures of underlying inflation also point to a slowdown in the annual rate.

New Zealand is far from alone in that regard. Many of our trading partners – most of whom report their inflation figures monthly rather than quarterly – have already seen a pullback in both headline and underlying inflation measures in recent months, after a strong pickup in the early part of this year. The common thread is oil prices, which rose sharply between early 2016 and early 2017 but have dropped back a bit since then.

As for New Zealand specifically, we can break the trends in inflation down to two broad themes. First, most of the slowdown in the inflation rate over the June quarter was in the tradables component. That includes the drop in fuel prices, but there were also some big price drops for importheavy items such as home furnishings and electronics.

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