New Zealand inflation modest RBNZ to stay dovish

PRESS RELEASE

New Zealand inflation modest RBNZ to stay dovish

Kiwi CPI inflation was in line with market expectations, at +0.5% in Q1 12 and +1.6% y-o-y. The rise partly reflects a bounce back in food price inflation, up +0.2% in Q1 after a -2.2% fall in Q4 11, as well a 14.5% hike in excise duty on tobacco. Exchange rate appreciation during March contributed to a decline in tradables inflation (-0.4%), while non-tradable inflation appears to be building, rising by +1.2% in Q1 12 compared to +0.2% in Q4 11. Nonetheless, at present inflation appears relatively contained with not much here to worry the RBNZ.

Facts
- In line with market expectations, headline CPI rose by +0.5% in Q1 12 compared to a -0.3% fall in Q411. In year-ended terms CPI rose by a modest +1.6% in Q1 12, down slightly on the +1.8% rise in the year to Q4 11.

- Tradable inflation continues to be weak, falling -0.4% in Q1 12 and in annual terms only rising +0.3%. The main driver appears to be seasonally lower prices for international airfares and package holidays, while a 6.4% rise in the NZD on a TWI basis helped to keep prices contained on books and AV equipment.

- Non-tradables inflation was up +1.2% in Q1 12 and +2.5% in annual terms and partly reflects the 14.5% increase in the tobacco excise duty from the start of the year.

- The two main measures of underlying inflation were both soft in the quarter. The trimmed mean (10% trim) and the weighted median rose by +0.5% and +0.4%, respectively. In annual terms, both the trimmed mean (+2.0%) and weighted median (+2.1%) remained around the centre of the RBNZ’s target band.

- Eight expenditure groups increased in the March quarter, with alcoholic beverages and tobacco (+4.7%) and housing and household utilities (+0.7%) making the largest upward contributions. Price declines occurred in the remaining three expenditure groups, with the largest fall coming from recreation and culture (-2.4%).

Implications
Today’s result was right on market expectations and slightly below the RBNZ’s forecast (+0.7% q-o-q and +1.7% y-o-y) published in its March monetary policy statement.

Looking at the details, it appears that part of the rise in the March quarter is due to one-off policy decisions, such as the 14.5% increase in the excise duty on tobacco and the an increase in dwelling insurance (+18%) on the back of an increase in the Earthquake Commission levy which occurred at the beginning of February. However, there might also be some concern for future inflation because of the rise in rentals for housing (+0.9%) during the quarter. It appears this was influenced by increases in the South Island, and it is likely that rental price pressures will only get worse until there is some pick-up in residential building activity.

The higher NZD, which is up +6.4% in the quarter on a trade-weighted basis, continued to play its part in helping to keep inflation contained with tradables inflation falling -0.4% in the quarter and follows the -0.9% decline at the end of 2011. While non-traded inflation was much higher in the quarter (+1.2%), it was mostly from policy decisions which will wash through the numbers as we move through the year.

To get a clearer read on the numbers it is useful to consider the statistical measures which seek to strip out the volatility in the CPI measure, these include the trimmed mean and weighted median. Both the trimmed mean and weighted medium showed only modest inflation in the quarter, rising by +0.5% and +0.4% respectively. While in year-ended terms, both measures of inflation remain around the RBNZ target band of 1-3%pa.

Bottom line
Inflation continues to be relatively contained with only a modest rise in Q1 2012.

The underlying measures of inflation continue to track around the middle of the RBNZ’s target band.

While the numbers should give the RBNZ little to worry about right now, we still think policy rates will need to rise in H2 2012 once the Canterbury rebuild ramps up.
ends

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