CPI: NZ's inflation falls - Blame the tomatoes, says HSBC

19 January 2012

CPI: New Zealand's inflation falls - Blame the tomatoes, says HSBC

Kiwi inflation came in well below expectations, falling by -0.3% in Q411, to be only 1.8% higher over the year (market had +0.4% q-o-q and +2.6% y-o-y). This partly reflects a sharp fall in vegetable prices (tomatoes in particular) in Q4 and the lagged impact of the strong NZD. However, there are also clear signs in the report that broad-based inflationary pressures have waned. It seems that inflation is not a problem in New Zealand. This opens the door for the RBNZ to consider cuts. But with rates already at very low levels we think they will prefer to remain on hold, and keep their limited stock of remaining powder dry.

Facts

• Headline CPI fell -0.3% in Q4 compared to a +0.4% rise in Q3 and is the first quarterly fall in two years. Market expected +0.4%. In year-ended terms CPI rose by a modest +1.8%, significantly down on the +4.6% rise in the year to Q3. Market expected +2.6%.
• Tradable inflation was especially weak, falling -0.9% in Q4 and y-o-y was up +1.1%. Vegetable prices fell by -25% in Q4. Non-tradable inflation was +0.2% in Q4 and +2.5% in annual terms - well within the RBNZ's target band.
• The two main measures of underlying inflation were both soft in the quarter. The trimmed mean (10%) and the weighted median rose by +0.2% and +0.4%, respectively. In annual terms, both the trimmed mean (+2.3%) and weighted median (+2.1%) are around the middle of the RBNZ's target band.
• Five expenditure groups declined in Q4 with food (-2.2%) and communication (-3.5%) making the largest downward contributions. The big fall in food prices came from lower prices for vegetables (-25%). While the remaining expenditure groups rose in the quarter, the increases were relatively small.

Implications
Today's result was a significant downside surprise for the market and for policymakers.

While a large fall in the headline y-o-y rate was always going to be expected, due to base effects as the tax changes which boosted inflation in Q3 2010 dropped out of the year-ended numbers, the numbers for Q4 alone were also well below anyone's expectation.

The market consensus survey had a range of 0.0-0.7% for Q4 and the RBNZ had forecast a +0.4% as recently as last month.

The fall in the quarter was driven by an unusual move in vegetable prices, which declined by a massive -25%. If vegetable prices had remained flat, the CPI would have registered a small rise. Vegetable supply had been constrained by the Queensland floods, with tomato prices falling by -57%, lettuce down by -64% and strawberries down -43%, as a result of a supply recovery.

This drove a -0.9% fall in tradables inflation. Tradables inflation was also held down by the lagged effect of the elevated NZD.

But weakness was not isolated to tradable goods. Non-tradables inflation only registered a rise of +0.2% in Q4. This partly reflected a fall in the prices of telecommunication services, driven by a fall in prices of internet and telephone services.

With such a low inflation result, the question the RBNZ will be asking is whether this means that demand has fallen away, or whether a collection of one-off supply shocks are to blame?

The way to consider this question is to look at the various underlying measures which seek to strip out the volatility in the CPI measure, including the trimmed mean and weighted median.

As it turns out, the trimmed mean and weighted median measures showed only modest inflation in the quarter, of +0.2% and +0.4%. Both are now sitting around the middle of the RBNZ's target band in y-o-y terms at +2.3% and +2.1% respectively.

So there is no getting around the fact that inflation is well contained in New Zealand.

Low inflation in New Zealand may also provide some indication that next week's Australian inflation print could be on the low-side, particularly as a result of falling vegetable prices.

Bottom line
Inflation is more benign than had been expected.

The underlying measures are now around the middle of the RBNZ's target band.

While this opens the door for the RBNZ to consider cuts, we think they will remain on hold given the already very low level of the cash rate.

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ENDS

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