New Zealand CPI solid -Inflation remains above target

18 April 2011 For Immediate Release

New Zealand CPI solid -Inflation remains above target

Kiwi inflation was 4.5% over the year to Q1, a touch weaker than the market expected (4.6%) but a little stronger than RBNZ forecast (4.4%). Headline CPI rose by 0.8% in Q1 (3.2% annualised), which is still above the RBNZ's comfort zone. While some of this will reflect the lagged effect of the GST increase last October, the rise in non-tradables inflation was strong (4.5% annualised). This may be of some concern to the RBNZ given non-tradables inflation is one of the best guides to domestic price pressures. Still expect rates on hold until Q4.

Facts

- Headline CPI rose by 0.8% in Q1 (versus consensus and HSBC forecasts of 1.0% and RBNZ forecasts for 0.7%).

- Over the year, CPI inflation was 4.5% (versus consensus of 4.6%, HSBC's 4.7% and RBNZ forecasts for 4.4%).

- Non-tradables inflation was 1.1% in Q1 and 5.2% over the year.

- Tradables inflation was 0.5% in Q1 and 3.7% over the year

- The numbers were still impacted by last October's GST increase from 12.5% to 15%, both in year-ended terms and in the quarter (due to lagged price changes).

Implications

No real surprises here. These numbers were a touch weaker than we (and the market) expected but a little stronger than the RBNZ had published back in mid-March. So, on balance, they do not change the story much. At a component level the non-tradables numbers suggest a little more domestic inflationary pressure than we had expected, though this is offset by lower tradables inflation and partly reflects the lagged effects of last October's GST hike.

Since the RBNZ's emergency rate cut in early March, in response to February's earthquake, we have expected the RBNZ to be on hold until later in the year. Today's New Zealand CPI solid result does not change that. Over recent weeks there has been further data published confirming that the economy was already staging a modest recovery when the February earthquake struck. High commodity prices and reconstruction spending are expected to see the economy picking up solidly in the second half of this year. With inflation still above the target band, and expected to remain elevated, the RBNZ is still expected to lift rates later this year.

A watch point will be the strong divergence between tradables and non-tradables inflation. While recent exchange rate strength could be expected to hold down tradables inflation, it is the non-tradables measure that is most closely tracked by the RBNZ when seeking to gauge domestic inflationary pressures. Non-tradables inflation is now running at its fastest pace in over a decade.

Bottom Line

Kiwi inflation is still solid. Combined with other indicators which suggest a recovery was occurring before the earthquake struck, we still expect the RBNZ to lift rates before the end of this year and raise the cash rate to 4.25% by end-2012.

Paul Bloxham, Chief Economist (Australia and New Zealand)

HSBC Global Research

Economics - Data Reactions

18 April 2011

© Scoop Media