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NZ 4Q inflation remains stuck in neutral

Wednesday 23rd January 2019

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New Zealand's inflation remained stuck in neutral in the fourth quarter but economists say the data does point to some emerging cost pressure.

The Consumers Price Index rose 0.1 percent in the three months ended Dec. 31, taking annual inflation to 1.9 percent, Stats NZ said.

Economists had been expecting the index would increase zero to 0.1 percent in the three months, for an annual increase of 1.8 to 1.9.

The Reserve Bank had tipped a quarterly rise of 0.2 percent and an annual increase of 2 percent.

The tradables CPI, which includes goods and services that compete with international rivals, fell 0.4 percent in the quarter and was up 0.9 percent in the year. Non-tradables inflation, which focuses on domestic goods and services, rose a quarterly 0.7 percent for a 2.7 percent annual increase. The central bank had expected the non-tradables figure to be 0.4 percent. 

"The details of the release were surprisingly strong, with non-tradable and measures of underlying inflation all lifting. Further, price pressure looks to be spreading through the economy with price increases evident in more sectors than the usual housing-related areas," said ASB Bank chief economist Nick Tuffley.

Tuffley said, however, "given the recent slowdown in economic growth and ongoing downside risks to the outlook, we think the RBNZ will remain patient for now. We continue to expect the RBNZ to leave the OCR on hold until August 2020."

Westpac Bank senior economist Michael Gordon also said "the details were actually on the hawkish side." 

However, while he expects a gradual pick up in domestic inflation pressures as the labour market tightens, "there is still some way to go before inflation tests the upper end of the target range. We expect the RBNZ to keep the OCR unchanged until late 2020."

The central bank is mandated with keeping annual inflation between 1 and 3 percent over the medium term, focusing on the mid-point. 

Stubbornly weak inflation has kept the OCR on hold at a record low 1.75 percent since November 2016 and the central bank has signaled no immediate change.  Annual inflation has ranged between 1.1 percent and 2.2 percent since December 2016, Stats NZ said.

ANZ senior economist Liz Kendall said the central bank will "take comfort" from the non-tradable inflation holding up "but will be vigilant that weakness in tradable inflation might flow through to inflation expectations." 

She also noted that it is "becoming increasingly apparent that economic momentum is now fading, with forward-looking indicators pointing to further gradual petering out." 

That, coupled with global risks, means "it remains our view that OCR cuts will be required late this year to keep growth at or above potential and keep inflation close to the target midpoint," she said. 

Ben Udy, Australia and New Zealand economist for Capital Economics, said he doesn't expect interest rate cuts given the improvement in underlying inflation.

However, he does expect headline inflation to fall further as the full impact of the recent drop in fuel prices is still to be felt.

"With headline inflation set to fall further below target, combined with a slowing in GDP growth, we think that rate hikes remain a distant prospect. Our view is that the RBNZ won’t hike until late-2021," he said. 

Stats NZ said petrol prices fell 0.6 percent in the quarter and were up 11.1 percent in the year.

“The price of petrol fell continually throughout the quarter, down from highs in October,” prices senior manager Paul Pascoe said. “By the last week of December, the pump price was 8.3 percent below the December quarter average.”

Stats NZ said the overall 0.1 percent quarterly lift was led by seasonal rises in international airfares, but these were largely offset by seasonal falls in the prices for vegetables.

International air transport lifted 7.6 percent on the quarter but was down 4 percent on the year.

Vegetables meanwhile tumbled 20.7 percent from the prior quarter and were down 8.4 percent on the year.

(BusinessDesk)

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