CPI rose 0.4% in December quarter against 0.3% market expectations; 1.3% inflation for the year; first time inflation has breached 1% in two years, taking it back into the RBNZ's targeted 1% to 3% band

By David Hargreaves

Inflation was higher than both the Reserve Bank and ‘the market’ expected in the December quarter, with the Consumers Price Index climbing by 0.4%.

This was against overall expectations of a rise of 0.3% and an RBNZ pick of just 0.2%.

On a seasonally adjusted basis, quarterly CPI rose by 0.7% quarter-on-quarter, which is the largest quarterly gain since September 2013.

In reaction, the already buoyant New Zealand dollar pushed up by about a quarter of a cent against the American currency, taking it to around US73C.

Higher fuel prices and housing-related costs as expected were big contributors, but the broad-based nature of price gains has surprised economists.

On those housing costs, housing-related prices were up 3.3% in the December 2016 year.

Prices for newly built houses excluding land rose by 6.5%, which was the highest increase since the middle of the last housing boom in 2005. Housing rentals increased 2%.

ANZ senior economist Philip Borkin, talking about the overall inflation figures, said ANZ analysis showed that 43% of the CPI ‘basket’ measured by Statistics New Zealand recorded annual price growth above 2%, which is the highest proportion in close to five years.

“We expect this theme of stronger and broader underlying pressures to develop further over the course of 2017. It is all consistent with an economy that is not only growing strongly, but increasingly hitting capacity and resource pressures,” Borkin said.

The December figures took the annual inflation rate to 1.3%, again higher than the overall market pick of about 1.2% and above the RBNZ’s forecast of 1.1%.

This means the inflation rate has jumped back into the RBNZ’s 1% to 3% targeted band for the first time in two years.

It also means that the official interest rate cut made by the RBNZ in November, taking the Official Cash Rate down to a record low of 1.75% is most certainly the last cut for the foreseeable future.

 

Indeed today’s figure will likely increase market speculation that an upward move in the OCR may now occur as soon as later this year, though most economists still think that’s unlikely.

The 0.4% December quarter CPI rise follows a 0.3% rise in the September 2016 quarter.

Statistics New Zealand’s prices senior manager Jason Attewell said in the December quarter there were higher prices for petrol, air fares, and new house builds – partly offset by lower prices for food and furniture.

Petrol prices made the largest upward contribution for the quarter, up 4.1%. The average price of a litre of 91 octane petrol in the December 2016 quarter was $1.82, up from $1.75 in the September quarter.

Food prices fell 1.2% in the latest quarter, with seasonally lower fruit and vegetable prices being partly offset by higher prices for dairy products. 

In highlighting that the latest figures meant that it was the first time in over two years that annual price increases for household purchases have been over 1%, Attewell said household price inflation was up from a historical low of 0.1% for the December 2015 year.

He said prices for tradable goods and services were 0.1% lower in the year to December 2016. Despite higher quarterly prices, petrol and international airfares were cheaper than a year ago. Non-tradable goods and services showed a 2.4% increase, influenced by housing-related price increases.

Attewell said housing-related prices in Auckland increased more than the national average, with new houses up 8.2% and rents up 3.2% from a year earlier. 

ASB chief economist Nick Tuffley said ASB economists had expected any inflation over the fourth quarter to have been driven largely by the construction and tourism sectors as well as an increase in petrol prices.

“However, the stronger than expected lift in inflation was more broad based than we had anticipated.

“On the tradable side of the equation, higher petrol prices were a boost to inflation as expected.  But higher clothing and footwear prices (up 1% and 1.9% respectively) on less discounting activity as well as a 1.9% qoq increase in vehicle purchases and a 11.2% qoq increase in international airfares also boosted the tradable inflation picture.

“The rise in clothing and footwear is surprising given the Q4 [Quarterly Survey of Business Opinion] results suggesting the NZD was holding down retail prices.  However, given the ongoing strength in the [New Zealand dollar], we expect further downward pressure on these components going forward.”

Tuffley said ASB expected the RBNZ will wait for inflation to return to comfortably within the target band before any rate hikes are considered.

“We continue to expect the RBNZ to leave the OCR on hold for the foreseeable future.  Further OCR cuts are well off the table, barring some major development.  But OCR hikes this year, as priced into wholesale interest rates, still seem premature.”

Consumer Price Inflation by Group

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for(i=0;i

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