New Zealand CPI still low: Held down by a high NZD

New Zealand CPI still low: Held down by a high NZD

Facts
- Headline CPI increased +0.2% q-o-q and +0.7% y-o-y, slightly below market expectations (market and RBNZ had +0.3% q-o-q, +0.8% y-o-y)
- Tradable inflation remains subdued, falling -1.6% for the year. Non-tradable inflation sat slightly below average rates, rising +2.5% over the past year.
- Measures of core inflation remain subdued, with the trimmed mean and weighted median measures sitting at +0.8% and +1.3% on an annual basis respectively.
- An elevated exchange continues to dampen inflation pressure in the New Zealand economy. Declines were seen in the prices of the most exchange rate sensitive goods, including clothing and footwear (-1.8% y-o-y) and audio visual equipment (-11.3% y-o-y). There was some evidence of inflation pressure rising in the housing sector, with a +4.1% y-o-y rise in construction costs.

Implications
Inflation remained subdued in the New Zealand economy over the past year, with annual inflation sitting below of the RBNZ’s target band at 0.7%. An elevated exchange rate continued to dampen imported goods prices, with tradable prices falling by -1.6% for the year. In particular, price declines continued to be seen in the consumer durables categories, including items like household appliances and audio-visual equipment.

Non-tradable inflation also remains slightly below average, reflecting a modest degree of spare capacity that persisted in the economy over the past year. Prices of non-traded goods rose by +2.5% annually. However, there are pockets of inflation pressure revealed in the data, focused in the housing sector. In particular, construction cost inflation reached +4.1% nationwide, boosted by post-earthquake construction activity, following a 12% annual increase in Canterbury construction costs. There was also evidence of pressures spilling over to the rest of the economy, with a lift in construction cost inflation in Auckland.

We expect inflation pressure will build from here. In particular, the NZ dollar TWI has fallen by -6.5% from its peak in April. As a result, tradable inflation will begin to increase from subdued rates as retailers are expected to pass-through higher import costs.

In addition, the New Zealand economy is currently operating with limited spare capacity. Survey indicators point to solid growth in the New Zealand economy at the moment, supported by rebuild activity, a strong housing market and low policy rates. As such, New Zealand is likely to hit capacity constraints in the near term.

With capacity pressure rising, and the New Zealand dollar no longer providing an offset through lower import prices, we expect inflation pressures to build in coming quarters. As a result, the RBNZ may need to contemplate lifting policy rates from current stimulatory levels, a move which could occur as early as the end of this year.

Bottom line
Inflation remained subdued in the New Zealand economy in Q2, as the elevated exchange rate continued to dampen tradable inflation.

Recent falls in the NZD coupled with a build-up in capacity pressures should see inflation begin to lift from here.

As a result, the RBNZ may need to contemplate lifting policy rates from current stimulatory levels, a move which could occur as early as the end of this year.

ENDS

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