Inflation steady; kiwi falls as rate hikes questioned

UPDATED: New Zealand inflation held steady in the second quarter compared to the first-quarter pace as gains in prices of electricity, home rentals and new houses were partly offset by cheaper package holidays, vehicles and liquor. The New Zealand dollar fell as traders mull the future interest rate track.

The consumers price index was unchanged at 0.3 percent, for an annual rate of 1.6 percent, according to Statistics New Zealand. That’s below the 0.4 percent quarterly and 1.8 percent annual pace forecast in a Reuters survey and broadly in line with the central bank’s expectations. Still, the data may prompt the Reserve Bank to question its track to raise interest rates after dairy prices dropped 8.9 percent at the latest GlobalDairyTrade auction today.

Westpac Banking Corp economists said the inflation picture was "a little more modest than the RBNZ might have feared" and may create some uncertainty on whether governor Graeme Wheeler will hike the official cash rate a quarter-point to 3.5 percent next week after dairy prices fell to the lowest since December 2012.

The currency dropped to 87.19 US cents from 87.65 cents immediately before the release, adding to a decline overnight from more upbeat assessment of the US economy by Federal Reserve chair Janet Yellen and the slump in global dairy prices

"I think people are probably thinking from a currency perspective there is a chance that July might not be a done deal, but we still consider it to be done," Bank of New Zealand currency strategist Raiko Shareef said. "I think from generally speaking it's probably taking the kiwi to where it should be, given what we had in dairy prices and from the FOMC (Federal Open Market Committee) overnight."

The tradable component of CPI rose 0.2 percent in the second quarter, half the rate of the non-tradable component, which rose 0.4 percent. In the year, tradable inflation was 0.1 percent, the first gain since March 2012, while non-tradable inflation was 2.7 percent.

The trimmed mean measures, which exclude extreme price movements to show ‘underlying’ price changes, were 0.2 percent in the second quarter.

Prices for housing and household utilities rose 1.2 percent in the latest quarter, the biggest upward contribution to the CPI, as electricity prices rose 4.2 percent, housing rents gained 0.6 percent and newly built houses excluding land rose 1.2 percent.

The government statistician said the gain for housing and household utilities was the largest since a 1.6 percent gain in the fourth quarter of 2010. On an annual basis it was up 3.4 percent.

Food prices rose 0.9 percent in the quarter, driven by a 13 percent jump in vegetables and a 2.5 percent gain for milk, cheese and eggs. Food prices rose 1.6 percent in the year.

Package holiday prices fell 6.5 percent in the quarter, likely influenced by the buying power of a high kiwi dollar. Fruit fell 4.9 percent, vehicle purchases declined 1.2 percent and alcoholic beverages dropped 0.7 percent.

Among other groups, household contents and services gained 1.1 percent in the quarter, health was up 0.2 percent, education gained 0.4 percent and clothing and footwear was up 0.1 percent. Recreation and culture dropped 1.1 percent, transport was down 0.3 percent, and communication fell 0.9 percent.

Six of the 11 groups measured rose and five fell.

The inflation data comes after the Quarterly Survey of Business Opinion showed a net 33 percent of firms surveyed expect to lift prices in the next three months, the second quarter in a row where expectations were above the long-run average.

(BusinessDesk)