Wednesday, January 21, 2015

Data Insight: NZ CPI

Key points:

  • New Zealand’s December quarter CPI came in at -0.2% q/q and +0.8% y/y.  That was weaker than our expectations of -0.1% q/q.
  • As expected the fall in oil prices was the primary downside contributor with petrol prices falling -5.7% over the quarter.  Further petrol price falls will be reflected in March data with the CPI likely to fall -0.3% in that quarter.
  • The weakness in the quarter went beyond just petrol however with general weakness across the traded goods sector.  The high exchange rate remains the likely culprit.
  • The annual rate of inflation is now below the bottom-end of the RBNZ’s target band again.  It will head lower in March and on our current forecasts is expected to remain below 1% for all of this year. 
  • While this may be causing the RBNZ some discomfort, there is not much they can do about it.  They can’t cut interest rates given the strength in the housing market and signs of rising capacity pressures, even though that is not yet reflected in consumer prices. 
  • Nor should they do anything about it.  The dip lower on the back of weaker oil price will prove transitory.  The Bank should look through that in the same way they should look through price shocks to the upside.
  • That said, general inflationary pressures have been weaker than expected and the Bank is clearly ahead of the curve.  But we continue to believe the next move in interest rates is up although that now appears a 2016 story.
  • Where interest rates head from here will not be determined by the price of oil but rather the extent to which the New Zealand economy can to continue to grow at an above-trend pace without generating inflationary pressures.  That will largely be determined by the extent to which wages respond to continued falls in the unemployment rate.