NZ: Q2 CPI likely to disappoint with 0.1% print - BNZ

Craig Ebert, Senior Economist at BNZ suggests that there is a tension developing between headline and core inflation of New Zealand and unless commodity prices stage another rebound, headline CPI inflation looks set to slow over the next 6-12 months or so.

Key Quotes

“But core inflation is inclined to keep grinding higher. At least, that is, in respect to the New Zealand economy, with the capacity pressures it is running into. Tomorrow’s June quarter CPI report should be judged with all of this in mind.”

“In terms of the headline, the median expectation from polls is that the Q2 CPI will increase 0.2%. This is seen slowing the annual rate of CPI inflation to 1.9%, from the 2.2% it got up to in Q1. There are no polls on core inflation measures in New Zealand (in contrast to Australia, where there are).”

“We have recently choked back our nearer-term CPI expectations, largely on account of the fall in petrol prices throughout June. The 0.2% increase in June’s food prices (3.0% y/y), meanwhile, was in line with our priors. For the June quarter CPI this all means we are now picking an increase of 0.1%, which would slow the annual rate of CPI inflation to 1.8%.”

“We would go on to point out that we forecast annual CPI inflation to slow to 1.6% in Q3 and all the way down to 1.1% by the March quarter of 2018. This is partly the ripple effect of oil prices but also recognition of the robust exchange rate. Coincidentally, the May MPS also forecast a dip to 1.1% by March 2018 – but that was before the latest sag in oil prices and wriggle up in the currency. This is why we think the Bank will remain (overly) cautious on the OCR for the foreseeable future.”