NZ CPI: As low as it goes - BNZ

Doug Steel, Senior Economist at BNZ, suggests that the NZ’s consumer price inflation is low as on an annual basis, inflation edged down to 0.2% in Q3 from 0.4% in Q2.

Key Quotes

“The annual reading was the consequence of the 0.2% gain in Q3 itself which was the result of higher housing-related costs and vegetable prices, with some offset from lower fruit and transport prices (the latter including lower fuel and lower vehicle relicensing fees as a result of the well-signalled cut in ACC levies). These moves were broadly in line with priors.

The 1.1% q/q gain in housing-related inflation was as we expected, although with stronger-than-anticipated gains in construction costs offset by less-than-expected increases in rents (on the latter it was interesting that this quarter saw the highest proportion of rent increases since the March 2008 quarter). So not large rent increases, but rent increases have become more widespread. This fits with the widespread nature of the current housing boom.

Rightly or wrongly, there is always a lot of focus on inflation outcomes as market participants dissect the decimal points to try and deduce what it means for RBNZ policy. In the case of annual inflation, there is no dissecting to do, with the headline CPI result exactly matching RBNZ priors. Nothing obvious there to divert the Bank from cutting in November, as we forecast, and as its ongoing guidance has suggested.

Sure, the quarterly CPI result was a tick higher than RBNZ priors, but well within its tolerance levels clearly, and usefully, set out in a speech last week. On the other side, annual non-tradeable inflation, at 2.1%, was a tick lower than the central bank anticipated (and, still, generally held down by the reduction in motor vehicle ACC levies).

We see annual CPI then pushing on toward the mid-point of the target band over following quarters and into 2018. Strong economic growth that is putting pressure on existing capacity is part of this view. So too our expectation that previous deflation in the tradeable sector will rapidly fade and even turn mildly inflationary as commodity prices have generally stopped falling and turned higher (and that the NZD does not push materially higher from here).

If inflation does push higher from here, and inflation expectations are more backward looking as the RBNZ has highlighted recently, inflation expectations could push higher relatively quickly and the RBNZ easing bias evaporate. Such an outlook makes further OCR cuts in 2017 more tenuous.

But we are not there yet. At this point, as  numbers show, inflation is close to zero. We think the RBNZ would still like to see evidence of inflation pushing higher and, importantly, inflation expectations doing the same. On the latter, the upcoming readings will be important including the RBNZ’s own survey of such due for release on 2 November.”