Data Flash (NZ) Consumers Price Index - Q1 2001

Data Flash (New Zealand) NZ Consumers Price Index - Q1 2001

Key points

The CPI fell 0.2% qoq in Q1, leading to a decline in the annual rate of inflation from 4.0% to 3.1%. The outcome was well below the average market expectation of 0.1% (the RBNZ forecast -0.1% in March).

As expected, the Government's reduction in rentals for state houses (contribution: -0.57pp) and lower petrol prices (-0.35pp) made significant negative contributions to the headline result.

The key surprise was an 8% qoq fall in international airfares, subtracting 0.20pps from the headline result.

As expected, partially offsetting upward contributions were made by food (+0.45pps), domestic airfares (+0.06pps), used cars (+0.08pps), tobacco (+0.09pps) and medical insurance (+0.08pps).

Tradeables inflation was 0.1% qoq, reducing the annual rate from 5.4% to 4.9%. Non-tradeables inflation was -0.5% qoq, with the annual rate falling from 2.4% to 1.2%. However, excluding the impact of lower state house rentals, non-tradeables inflation would have recorded a rise of around 1% qoq.

The weighted median, which provides a better assessment of the underlying tendency of inflation, rose by 0.6% qoq (compared with 0.8% qoq in Q4), lifting the annual rate from 1.9% to 2.0%.

Excluding fresh fruit and vegetables, petrol, tobacco and state house rentals from the CPI, our estimate of the `core' rate of inflation was 0.5% qoq and 2.7 % yoy (see chart below).

We estimate that the retail trade deflator will record a rise of 0.5% qoq in Q1. Given our forecast for nominal retail sales growth in March, this implies real growth in retail volumes in the March quarter of over 1% qoq.

Commentary

As in Q4, the various measures of core inflation point to current pressures consistent with inflation outcomes in the upper half of the RBNZ's 0 to 3% target band (our core measure and the weighted median, when annualised, point to an inflation trend of 2-2.5% yoy). While the weak NZD accounts for the high rate of tradeables inflation, the continued rise in non-tradeables inflation is likely to become increasingly uncomfortable for the RBNZ.

Looking ahead, our preliminary forecast for the June quarter is for a 0.6% qoq increase in the CPI (3.0% yoy). Lower food prices - as fruit and vegetable prices correct to a more normal level - should make a negative contribution, as should a decline in electricity prices. However, these factors will be more than offset by further increases in the prices of exchange-rate sensitive items, higher insurance costs, and a rebound in international airfares and stationery prices. Our forecasts imply that our measure of core inflation will rise 0.7% qoq to 2.9% yoy.

That profile is consistent with significant pressure in the `inflation pipeline', as demonstrated by recent PPI and import price trends (see chart below). While the latest Quarterly Survey of Business Opinion (QSBO) has pointed to the abatement of price pressure, the pricing intentions series is still at a level that implies inflation outcomes well above the mid point of the RBNZ's target band (see chart below). Renewed NZD weakness is adding to upside inflation risks, making it increasingly difficult for businesses to avoid price increases. Contrasting with these trends, the RBNZ's forecast published in March shows annual inflation falling back to around 1.5% by the end of this year and staying at around that level.

In the past, the RBNZ would have been extremely reluctant to ease monetary policy in the face of relatively high underlying inflation outcomes and upside risks to its medium-term forecasts. However, in recent times, the RBNZ has shown greater inclination to adopt a more medium-term approach to achieving its inflation target. This suggests that forward-looking factors, including the expected impact of the slowdown in global growth and the onset of less favourable climatic conditions in the agricultural sector, will play a greater role in the Bank's decision making than in the past. As a result, and given the RBNZ's more optimistic view of the inflation outlook than our own, we maintain our expectation that the RBNZ will deliver a further 25bp `insurance' cut in its Official Cash Rate (OCR) at tomorrow's interim OCR review (9am NZT).

However, given the presence of upside risks to the inflation outlook, we think that the Bank will be anxious to avoid giving the impression that the market should be pricing any further cumulative easing than is currently reflected in the curve. Therefore, as in March, we expect that the accompanying policy statement will emphasise that sizeable risks remain to inflation, and that it remains far from inevitable that the latest easing will be followed quickly by further easing moves.

The market is fully pricing a 25bps rate cut while 13 of 13 market economists polled by Reuters concur with the market's assessment (with one economist expecting a 50bps cut). We would estimate an 80-85% probability of a 25bp rate cut. We think that a 50bp is unlikely given that the next meeting is just four weeks away on 16 May.

Darren Gibbs, Senior Economist, New Zealand,
Ulf Schoefisch, Chief Economist, New Zealand,

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