Inflation pressures lower than forecast

Consumer price inflation surprised economists by its moderate increase this morning.

The latest consumer price index (CPI) rose 0.4% for the September quarter, below the consensus market forecast of a 0.7% rise.

The result gives the Reserve Bank some breathing space: the central bank also forecast a rise of 0.7% and is due to review its official cash rate (OCR) on Thursday morning. The OCR is currently at 2.5%.

Although no economists expect Reserve Bank governor Alan Bollard to move the OCR on Thursday, some indication of the possible timing of the next move is possible.

Today’s CPI figure shows the Reserve Bank does not – yet – have to worry about price inflation pressures.

It also shows the impact of last year’s GST rise has worked through the prices faster than anticipated.

The quarterly increase would have been 0.4% even without the GST rise, Statistics New Zealand prices manger Chris Pike said.

The annual CPI increase is 4.6%, but this would have been 2.5% had there been no GST rise in October.

Over the year, the main price rises have been an 18% rise in petrol prices, a similar rise in vegetable prices, and a 12% increase in cigarette and tobacco(mostly due to higher excise taxes).

Other main increases over the year were a 6.6 rise in local council rates, a 4.6% rise in electricity prices, and a 3.6% rise in new housing.

As far as the most recent quarter was concerned, the main components were food, up 1.7% due to an 18% spike in vegetable prices; and local authority rates, up 4.1%, which pushed up the household and household utility category by 0.7%.

The main drop in prices was in transport costs, due to a 3.3% drop in petrol prices. Another primary contributor was a 3.6% drop in communication prices, mostly due to lower prices for broadband services and international telephone calls.

TD Securities senior strategist Roland Randall said there is now no doubt that RBNZ will remain on hold for some time.

“Markets were never expecting interest rates to rise on Thursday, but there was a risk that the language would become incrementally more hawkish, bringing forward rate expectations (1st hike currently priced for around July 2012), putting upward pressure on short-rates. This bet, on the balance of risks being to the upside for rates, will have been cut right back after this morning’s exceptionally weak CPI print,” Mr Roland said.

“Indeed, the balance of risks around a change in the tone of the RBNZ statement this Thursday is now more two-sided that it was. Building up the dovish side, we already had received downside surprises from 2Q GDP, August trade deficit and September retail card spending, only offset by a large upside for building approvals (but that was mostly approvals for relocatable units for temporary housing in the earthquake zone – not a big generator of activity). Now the RBNZ could choose to dwell on weaker domestic activity and price signals, as well as risks from offshore; and that would make for a more dovish statement than it delivered in September.”

The kiwi dollar slumped more than 40 pips to below $0.8040, taking back all the overnight gains.

HSBC economists said the 0.4% inflation figure would  provide some comfort for the RBNZ as it may give them a bit more wriggle room.

"As we argued last week, they are likely to keep rates on hold on Thursday in response to heightened global uncertainties. Today's report will help them to do this. However, the RBNZ still needs to keep its eye on the ball. Abstracting from the tax changes last year - which StatsNZ suggested added 2.1ppts to the headline y-o-y rate - inflation was still running at 2.5% y-o-y. This is still in the upper part of the RBNZ's target band of 1-3%," they said.

While inflation looks contained for the moment, they still expect to see inflationary pressures continuing to build from here for two reasons - one, Statistics NZ has introduced new weights for the CPI which gives a higher weight to food and housing costs, both of which are components that typically run at higher levels than the CPI average; second, the economy is in the midst of an upswing.