So near and yet so far

The first inflation reading for this year was as subdued as we expected, with annual inflation dropping to 1.1%. We expect this dip to be short-lived, with several factors working to push inflation higher over the rest of this year. Yet a sustained return to the Reserve Bank's target midpoint remains elusive, particularly with signs that housing-related inflation may have already passed its peak.

Consumer prices rose by 0.5% for the March quarter, which was in line with our forecast but a touch below the Reserve Bank's estimate of a 0.6% rise. The quarterly result was by no means a weak one – in fact it was one of the stronger quarterly outturns in recent times. And that was even after the impact of the new Government policy of a year's free tertiary study, which knocked 0.14% off the inflation rate.

Tradables inflation remains weak, with prices in importheavy categories such as clothing, furnishing and electronics all softer than we expected. That highlights the lack of inflation pressures among our trading partners, as well as the ongoing squeeze on New Zealand retailers' margins. The New Zealand dollar hasn't given much of an assist to import prices in recent times, with only a slight fall in the exchange rate over the last year.

In contrast, the more persistent non-tradables components were a little stronger than we expected (and quite a bit higher than the RBNZ's forecast). Non-tradables inflation has picked up a bit from its lows in the last couple of years, in keeping with an economy that is running closer to full capacity. However, it remains well below the levels we saw in the years before the financial crisis.

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