Data Flash: Preview Consumer Price Index
Data Flash (New Zealand) - Preview Consumer Price Index Preview - Q2 2000
Deutsche Bank forecast: +0.8% qoq, with balanced risk distribution RBNZ projection: +0.6 % qoq Market expectations (median): +0.8% qoq (range: +0.5 to +1.1%) Previous release (Q4): +0.2% qo
Q Key Points
We expect the CPI to have risen by 0.8% qoq in Q1, lifting the yoy rate to 1.8%. This follows the much lower than expected outcome of +0.2% qoq in Q4. The RBNZ expect an increase of 0.6%, placing it firmly at the lower end of market expectations. Our analysis of price trends suggests that increases in the food and transportation subgroups alone will be sufficient to realise the RBNZ's forecast.
The key contributors to the Q1 result are expected to be a 1.5% rise in the food group (due to a sharp bounce- back in fresh fruit and vegetable prices), a 2.1% rise in the transport group (driven by a 6.2% rise in petrol prices and the curtailing of some airfare discounts) and a 1.1% rise in the recreation and education group (reflecting an expected 13% rise in tertiary tuition fees). The risk distribution around our forecast is balanced.
The increase in underlying inflation pressures between Q4 and Q1 is exaggerated by movements in volatile food prices and the annual Q1 increase in tertiary tuition fees. Excluding the impact of these factors, Q4 CPI inflation would have been +0.3% and our forecast for Q1 is +0.4%.
Looking ahead, our provisional estimate for the Q2 CPI is +0.5% qoq, followed by +0.6% in Q3 and Q4. This outlook is consistent with recent indicators of pipeline pressures eg the increase in Q4 import prices (+5.5% qoq) and the Q4 PPI (+1.5% qoq). In both cases, oil only accounted for around one third of the increase. Latest productivity trends do not suggest that additional costs can easily be absorbed. With the economy having moved into positive output gap territory, the risk of a pass-through into consumer prices is high.
Unless the CPI prints significantly lower than even the RBNZ is expecting - an event we consider unlikely - we are confident that the RBNZ will take the opportunity on 19 April to raise the OCR by 25 bps. In doing so, the Bank would move overall monetary conditions a step closer to what might be considered a neutral level. An outturn slightly below the RBNZ's forecast could raise some questions about the path of interest rates once the neutral level has been reached. An outturn at or above the market's forecast would raise the likelihood of a significant upward revision to the inflation and/or interest rate profile when the RBNZ next publishes updated forecasts on 17 May.
Deutsche Bank CPI Forecasts (Q1 2000)
Group (series weights) q% change a% change contribution to q% change Food (18.2%) 1.5 -0.1 0.26 Housing (23.0%) 0.3 1.9 0.07 Household Operation (14.8%) -0.1 -0.4 -0.01 Apparel (3.7%) 0.1 1.8 0.00 Transportation (15.4%) 2.1 7.1 0.33 Tobacco/Alcohol (9.3%) 0.2 1.1 0.02 Personal/Health Care (6.0%) 0.5 1.0 0.03 Recreation/Education (8.8%) 1.1 2.5 0.09 Credit Services (0.7%) 1.1 -4.4 0.01 Total CPI Official series: three 0.8 1.6 0.80 quarters of new regimen spliced onto one quarters of interest rate inclusive old
RBNZ approach: based on 4 0.8 1.8 0.80 quarters of new regimen (backdated to achieve consistency)
Source: DB Global Markets Research
Detailed Component Forecasts
Food: Following a sharp fall over the past 3 quarters, a 10% rebound in fresh fruit and vegetable prices is expected to have occurred in Q1. This will result in a 1.5% qoq increase in the food group, in turn contributing around a third of the increase in the overall CPI.
Housing: While a slowdown in new building activity is expected to have had a dampening influence on construction costs, higher world timber prices are expected to have fed through into increased prices of retail timber.
Household Operations: Despite the weakness of NZD we expect further discounting to have occurred in the appliance sector. Phone call charges are also expected to have continued their trend decline. These influences more than offset modest price rises in a variety of other components, resulting in a small negative contribution from this group to the overall CPI movement.
Apparel: Reports of strong demand in this sector suggest that the usual Q1 discounts will not have been realised.
Transport: A variety of factors mean that this subgroup is expected to make the largest contribution to the overall Q1 increase. We estimate that petrol prices were 6.2% higher on average over the quarter, contributing in excess of 0.2 percentage points to the total CPI movement. The remaining contribution stems from increases in new and used car prices (as a result of the weak NZD) and a small rebound in airfares (reflecting the curtailing of discounts on some routes).
Tobacco and Alcohol: The regular increase in excise taxes on tobacco is expected to have been only partially offset by a decline in beer prices following the introduction of supermarket sales.
Personal and Health Care: The trend of rising fees for medical practitioners and medical and healthcare supplies is expected to have continued in Q1.
Recreation and Education: The usual Q1 rise in tertiary tuition fees - estimated at 13% this quarter - dominates this group. A partial offset is expected to have been provided by the usual Q1 discounting of stationary.
Credit Services: This group, representing just 0.7% of the total CPI regimen, is expected to have risen 1.1% reflecting increased fees and margin increases on financial products.
Ulf Schoefisch, Chief Economist, NZ Darren Gibbs, Senior Economist, NZ
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