CPI: New Zealand inflation still elevated

PRESS RELEASE

25 October 2011
For immediate release

CPI: New Zealand inflation still elevated
Though a bit weaker than expected

New Zealand inflation surprised on the downside with the CPI coming in at 0.4% in Q3 and 4.6% y-o-y (consensus was 4.9%). The downside surprise was on tradable goods and services, reflecting the strong exchange rate. Domestic inflationary pressures are still solid, with non-tradables running at 4.5% y-o-y. StatsNZ estimates suggest that abstracting from last year's tax changes, headline CPI was running at 2.5% y-o-y, so inflation remains in the upper part of the RBNZ target band. Rates still need to rise, though today's release suggests there may be a bit more time.
Still expect rates on hold this week.

Facts
- Headline CPI rose by 0.4% in Q3, which was lower than expected by consensus and HSBC at 0.7%.
- Over the year, CPI inflation ran at 4.6%, versus a consensus expectation of 4.9%.
- Tradables inflation rose by 0.1% in Q3, to be 4.6% y-o-y. The low level of tradables inflation partly reflects the 4% appreciation of the exchange rate in Q3.
- Non-tradables inflation rose by 0.6% in Q3, to be a strong 4.5% y-o-y.
- The main contributors in the quarter were food, housing and utilities prices.
- Lower petrol prices contributed to a fall in transport prices in the quarter.
- StatsNZ estimates suggest that headline CPI ran at 2.5% y-o-y in Q3 when they abstract from the impact of the increase in the GST last year.

Implications
Inflation in New Zealand came in lower than expected in Q3. This will provide some comfort for the RBNZ as it may give them a bit more wriggle room.

As we argued last week, they are likely to keep rates on hold on Thursday in response to heightened global uncertainties. Today's report will help them to do this.

However, the RBNZ still needs to keep its eye on the ball. Abstracting from the tax changes last year - which StatsNZ suggested added 2.1ppts to the headline y-o-y rate - inflation was still running at 2.5% y-o-y. This is still in the upper part of the RBNZ's target band of 1-3%.

While inflation looks contained for the moment, we still expect to see inflationary pressures continuing to build from here.

One part of this story is that StatsNZ has introduced new weights for the CPI which gives a higher weight to food and housing costs, both of which are components that typically run at higher levels than the CPI average.

Another key issue is that the economy is in the midst of an upswing. With interest rates still at emergency low levels, the economy receiving support from the high level of dairy and meat prices and the reconstruction in Canterbury just getting started, we expect inflation to build from here.

Bottom line
Inflation was weaker than expected in Q3.

With New Zealand in the early stages of recovery and rates still at emergency lows we expect the RBNZ to be lifting rates soon.

We think that global uncertainties will keep them on hold this week, but still have in mind the RBNZ will lift rates before year end.

Paul Bloxham, Chief Economist (Australia and New Zealand)
Luke Hartigan, Economist (Australia and New Zealand)
HSBC Global Research
Economics - Data Reactions
25 October 2011

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