By Bernard Hickey
Inflation was slightly stronger than most economists expected in the September quarter because the lower New Zealand dollar led to more imported inflation, but domestic inflation remained subdued because of ACC levy cuts and free doctor’s visits for kids.
Economists said the result was unlikely to shift the Reserve Bank’s thinking much on when it would next cut the Official Cash Rate, with most still predicting a pause on October 29 before a final cut to 2.5% on December 10. The overall result was in line with the Reserve Bank’s forecast.
Statistics New Zealand reported the Consumer Price Index rose 0.3% in the September quarter from the June quarter as higher housing related costs more than offset a fall in ACC levies.
Annual inflation was 0.4% in the September quarter from the same quarter a year ago, which was unchanged from annual inflation of 0.4% in the June quarter.
Economists had expected quarterly inflation of 0.2% and annual inflation of 0.3% so the result was slightly higher than expected, but non-tradable inflation was flat for the quarter, which was the weakest result since March 2001. Annual non-tradable inflation of 1.5% was the lowest since the December quarter of 2001. ACC levy cuts for cars and increased subsidies for doctors visits by children were a factor.
The result was in line with the Reserve Bank’s September Monetary Policy Statement forecast for 0.3% inflation in the quarter, although flat tradable inflation was weaker than the Reserve Bank’s 0.1% forecast.
“The main upward contribution came from housing-related prices, which increased 1.2 percent,” said prices senior manager Chris Pike.
“This was mostly influenced by higher prices for local authority rates, new houses excluding land, and housing rentals,” he said.
Vegetable prices rose14% in the September 2015 quarter and package holiday prices rose 7.5%.
Prices for tradable goods and services rose 0.7% in the quarter, with the weaker New Zealand dollar influencing prices for overseas package holidays and petrol.
Non-tradable goods and services showed no overall change, as housing-related price rises were offset by lower vehicle relicensing fees and increased subsidies for GP visits for children.
Housing and household utility prices were up 2.7% in the year, with higher prices for newly built houses excluding land (up 5.5%), housing rentals (up 2.3%), and local authority rates (up 5.9%).
“The annual increase was influenced by housing-related prices, particularly in Auckland,” Pike said.
“Auckland prices for new houses excluding land were up 8.5%, and housing rentals and rates also increased by more than the national average.”
Westpac Chief Economist Dominick Stephens said overall inflation was slightly stronger than expected because tradable inflation 0.7% was a bit higher than forecast, although non-tradable inflation was weaker than expected.
“This reflects genuinely subdued inflation domestic inflation pressures as well as the decline in ACC levies,” he said, adding Westpac was likely to reduce its December quarter CPI forecast by 0.1% after today’s data.
“Our long-held view has been that low inflation will force the Reserve Bank to reduce the OCR below 2.5% in 2016,” Stephens said.
“By contrast, the RBNZ argues that the lower exchange rate will prompt sufficient inflation, meaning the OCR will only need to fall to 2.5%. Today’s data leans more in favour of the RBNZ’s view, but only slightly,” he said, adding that Westpac was due to publish research indicating very subdued inflation next year.
“Consequently, today’s surprise is not sufficient to dissuade us from forecasting a 2.0% low-point in the OCR.”
ANZ Senior Economist Mark Smith said the market would be watching the Reserve Bank’s publication of its core inflation measures at 3pm. It was 1.4% in the June quarter from a year ago and has been below the mid point of the Reserve Bank’s 1-3% target for 22 consecutive quarters.
“Signs of stabilisation on the activity front, and the need to keep some powder dry given downside economic risks, will likely encourage the RBNZ to pause over the remainder of the year,” Smith said.
“However, a negative global risk profile, concerns over NZD strength and the risk that much of the low inflation we are seeing will endure, will keep the risks tilted towards a lower OCR,” he said.
“Relative to the Reserve Bank September MPS pick, the major area of surprise was higher-than-expected tradable inflation, balanced by weaker-than-expected non-tradable prices,” he said, noting however the currency was currently 7% higher than the Reserve Bank’s estimate for the December quarter, “which will temper the rise in headline inflation that the Bank expects next year.”
“Competitive pressures are generally capping price rises in much of the tradable regimen, with falls in communication group prices, and parts of the household contents, recreation & culture groups,” Smith said.
ASB Senior Economist Jane Turner said the result had removed any doubt about a pause on October 29. She now expected the next cut to be on December 10.
“However, we still have doubts that inflation pressures will rise as much over the medium term as the RBNZ currently anticipates,” Turner said.
“The recent rebound in the NZD, for example, will undermine the RBNZ’s 2016 inflation outlook. The lack of underlying non-tradables inflation and weak pricing intentions also flag the risk of weak overall inflation pressures,” she said.
“Of concern for the RBNZ is the trend decline in seasonally-adjusted non-tradable inflation. Over 2014 seasonally-adjusted non-tradable inflation was running at 0.5/0.6% per quarter. This has now slowed to 0.3/0.2% per quarter. With growth set to slow over 2015 and 2016, we don’t expect non-tradable inflation to pick up meaningfully without further stimulus. With this in mind, we still see some risk of further cuts to the OCR beyond 2.5% at some point in 2016.”
(Updated with more detail, chart, reaction)