NZ: Inflation to remain around 2% through the remainder of 2017 - Westpac

The research team at Westpac explains that there has been a marked turnaround in New Zealand’s inflation environment in recent months as after lingering below the Reserve Bank’s 1 to 3% target band for much of the past two years, inflation jumped higher in the March quarter, with the annual rate climbing to 2.2%.

Key Quotes

“This is the first time that inflation has been above the Reserve Bank’s 2% target midpoint since September 2011.”

“Underlying much of the pick-up in inflation have been two big factors. First, the early part of 2017 saw strong increases in the prices of some fresh produce, such as apples and carrots. Those increases were related in part to climatic conditions. And with poor weather continuing in March and April, we're likely to see some further weather impacts on prices in the June quarter also.  Nevertheless, this still represents only a temporary boost to inflation.”

“Second, petrol prices have risen over the past year in response to higher global oil prices, and they are currently around 12% higher than this time last year.”

“Both food and fuel prices can be volatile, with factors unrelated to the strength of domestic economy causing sharp swings (such as unseasonable weather conditions). However, even outside of these categories we’ve been seeing a firming in New Zealand’s inflation environment.  That’s been reflected in the various measures core inflation which track the underlying trend in price movements, and which have been rising steadily since mid-2016.”

“On top of this, there were a number of import-heavy areas – clothing, used cars, electronic goods – where prices didn’t fall as much as expected in March. This could be a sign that firm domestic demand combined with a fall in import prices is allowing retailers to rebuild their margins. Recent business surveys have shown that retailers have become more optimistic about their ability to raise prices. If that’s the case, it could mean a bit more persistence in the inflation outlook than we previously thought.”

“Following the stronger than anticipated March quarter result, we now expect that inflation will remain around 2% through the remainder of 2017. That's a markedly stronger outlook for inflation than the Reserve Bank was expecting back in February when it released its latest set of projections. That will go a long way in terms of removing downside risks for inflation expectations, which had been a major bugbear for the RBNZ in recent years. It will also reinforce the outlook for wage inflation over the coming year, with higher costs of living adjustments and firm domestic activity expected to boost wage claims through 2017 and 2018.”