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NZ CPI growth slows, non-tradables still elevated

New Zealand CPI growth slows, but non-tradables inflation still-elevated

Growth in headline inflation slowed to 0.7%q/q in 1Q (JPMorgan 0.7%, consensus 0.8%) after spiking 1.2% in 4Q. Over the quarter, of the seven of the 11 CPI categories that logged increases, the food component made the largest contribution. Food prices again kept upside pressure on headline inflation in 1Q, rising 1.8%q/q, owing to a 3.6% surge in grocery prices.

The annual inflation rate increased from 3.2% to 3.4% in 1Q, remaining above the central bank's 1-3% target range for the second straight quarter. The annual rate of inflation was driven higher by rising petrol prices (+20.5%), which made the largest positive contribution to the rise in annual CPI. Had petrol prices remained constant, annual inflation would have increased just 2.5% in 1Q.

But, the most surprising aspect of the CPI print was the notable acceleration in the non-tradable component, up 1.1%q/q from 0.7% in the December quarter. From a year ago, non-tradables inflation (which is generated domestically and, therefore, not influenced by exchange rate fluctuations) held at 3.5% for the second straight quarter, remaining persistently high despite the recent downturn in domestic demand. Non-tradables inflation should soon start to moderate, however, as record high interest rates, elevated petrol prices, a rapidly deteriorating housing market, and drought conditions in key dairy producing regions continue to curb domestic demand.

Meanwhile, the tradables component increased 0.2%q/q in 1Q, slowing steeply from 1.8% in 4Q, owing primarily to the near 2% appreciation of NZD vis-Ã -vis the US dollar over the quarter. Had petrol prices remained constant, tradables inflation would have fallen 0.3%. The tradable component accelerated on a year ago basis from 2.8% to 3.4% in the March quarter, owing again to higher petrol prices.

The March quarter CPI print reaffirms our view that the RBNZ has little scope to ease monetary policy in the foreseeable future. Despite the forecast slowdown in economic momentum, widespread inflation pressures, particularly the elevated level of non-tradables inflation, mean that the OCR will remain at a record high 8.25% in 2008. Tight labour market conditions, rising commodity prices, and the government's expansionary fiscal stance will keep upside pressure on inflation.

Furthermore, New Zealand's trimmed mean (removing the most volatile 30%), which is closely correlated with Australia's core inflation measure, slowed to 0.8%q/q in 1Q from 0.9%. This falls in line with our forecast that on April 23 Australia's CPI will print the core measure at 0.9%q/q (3.8%oya), slowing slightly from 1.0% in the previous three months.

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