Consumer Price Index - Q4 2001
Data Flash (New Zealand)
The CPI increased by 0.6% qoq in Q4. That reduced the annual rate of inflation from 3.2% to 1.8%.
The key upward contributions were a 1.5% qoq rise in food prices (adding 0.27 pps to the result), a 6% rise in airfares (+0.18 pps), a 0.7% increase in construction costs (+0.07 pps) and a 1.6% increase in used car prices (+0.06 pps).
The only notable downward contribution was made by a 9.1% drop in petrol prices (-0.34 pps).
Tradeables inflation was +0.3% qoq (+0.7% in Q3), lowering the annual rate from 3.8% to 2.5%. Non-tradeables inflation was +0.7% (+0.5% last quarter), with the annual rate unchanged at 0.9%.
Measures of core inflation:
the CPI excluding fresh fruit and vegetables, petrol, tobacco taxes and state house rentals rose by 1.0% qoq (+0.8% last quarter). The annual rate reduced from 3.1% to 3.0%;
the weighted median of quarterly price changes was 0.7% qoq (up from 0.3% in Q3);
the weighted median of annual price changes fell from 3.0% to 2.5%.
The headline CPI result of +0.6% qoq was in line with the RBNZ's preliminary forecast published in the November Monetary Policy Statement and is unlikely to have any material influence on next Wednesday's review of the Official Cash Rate. We expect the Bank to leave the OCR unchanged at 4.75%, based on more positive global news and the recent run of domestic data, which included a renewed rise in business and consumer confidence, reasonable Christmas trading for retailers, continued strong migration inflows, as well as a buoyant housing market.
Looking further ahead, however, the breakdown of today's CPI result may raise some concern at the Bank. Relative to the 0-3% target range, measures of underlying inflation are still showing uncomfortably high figures (see above). Furthermore, the annual rate of increase in the headline CPI, which has a key influence on inflation expectations and wage demands, is likely to rebound to around 2.5% next quarter as the massive reduction of state house rentals in early 2001 drops out of the calculation.
We believe that a significant slowdown of the economy and/or a marked appreciation of the NZD will be required to generate enough downward pressure for the annual rate of CPI inflation to fall back towards the mid-point of the 0-3% target range in the medium term. As far as the economy is concerned, we expect the slowdown to be fairly temporary, with capacity utilisation falling back to neutral rather than below that level. Consistent with that, labour market pressure is unlikely to abate to any great extent.
That leaves the NZD appreciation as a key potential driver of falling CPI inflation going forward. While the fundamentals support the forecast of a stronger NZ dollar over the coming year, risks to this outlook remain on the downside. Moreover, lower import costs may initially lead to the rebuilding of profit margins rather than lower prices, which would be the reverse of what happened when the NZD declined in 2000.
Our conclusion from these considerations is that the RBNZ will see no room to cut rates further over coming quarters, unless the international situation deteriorates again and the timing of a recovery in the US gets shifted out further. Our central scenario includes modest US growth in Q1 and Q2 of this year, with an acceleration in the pace of growth to 3-4% in the second half of this year. Consistent with that, we expect the RBNZ to commence its interest rate tightening cycle in August.
Ulf Schoefisch, Chief Economist, New Zealand