NZ Consumers Price Index

Consumer prices rose 1.2% in the March quarter and are up 6.7% over the past year. The March result was below our forecast, and much lower than the RBNZ’s expectation.

New Zealand consumer prices rose 1.2% in the March quarter, with prices up 6.7% over the past 12 months.

Today’s result was lower than forex market expectations, and well below the RBNZ’s forecast for a 1.8% rise.

Annual inflation remains painfully high. However, inflation looks like it has now peaked.

Core inflation, while still high, is not pushing higher.

Today’s result supports our forecast for just one more OCR hike from the RBNZ in May.

The March quarter saw large price swings in some specific areas:

Food prices increased by 3.7% in the March quarter and by as much as 11% last year. This increase was partly due to the disruptions caused by the January storms and Cyclone Gabrielle, which caused significant damage to some crops. Food prices (including eggs) also rose sharply.

Inflation in the March quarter was also boosted by the annual tobacco tax increase; prices for cigarettes and tobacco products rose 7.6%.
Offsetting these increases to some extent was the decline in gasoline prices, which have fallen by about 2.6% in recent months.
But while there were large swings in some specific prices, core inflation was important to the BNZ. The various measures of core inflation (which smooth quarterly price fluctuations and reflect the underlying inflation trend) have remained high at around 6%. Crucially, however, it’s not rising further.

This is an important development for the RBNZ. Interest rates have been on the rise for over 18 months. Although price pressures remain very strong, there are now signs that price increases are gradually losing momentum.

In the March quarter, prices for a number of imported durable goods, such as home furnishings, were down. This is consistent with reports from retailers of weakening demand.

Looking at the major product groups, domestic (or non-tradable) prices rose 1.7% in the March quarter and are up 6.8% over the past year. That’s still very strong, but lower than the RBNZ expected.

Imported goods prices (sometimes referred to as tradable goods) rose 0.7% over the past three months and 6.4% over the past year. This is a significant decline from the rates we saw earlier this year.

What does today’s result mean for the RBNZ?

We expect another 25 basis point rate hike at the RBNZ’s May meeting. Inflation is still running at full speed and remains well outside the central bank’s target range.

However, it’s increasingly likely that May will be the last rate hike in this cycle. Inflation has fallen far short of the RBNZ’s second quarter forecasts, and there are signs that underlying inflationary pressures have peaked and may be easing. These developments are in addition to weakening demand in sectors such as construction. These are all important signs that the tightening of monetary policy over the past 18 months is finally having the intended dampening effect.