Closing In On The 2% Target

• The September quarter inflation print is due out next Wednesday. Consumer price growth likely accelerated over the quarter, up 0.8% from 0.4%. That should see the annual rate moderate to 2.3% from 3.3% - in line with the RBNZ’s forecasts.
• Imported deflation – led by falling petrol prices – continues to drag down overall inflation. Domestic inflation however is a slow-moving beast. Services inflation is still running hot. But slowing wage growth limits further moves to the upside.
• While all eyes will zero in on the headline print, the underlying trend is more important. Given the softening economic backdrop, we expect to see a further softening in core inflation next Wednesday.
• Inflation continues to move in the right direction. We’re closing in on the RBNZ’s 2% target, and sooner than we initially forecast. We need a full reversal of monetary policy back to neutral.

The September quarter inflation report is out next Wednesday. And we’re expecting some good news. By our calculations, we see inflation slowing to 2.3% from 3.3% - the lowest in more than three years. Over the quarter, we expect consumer prices rose 0.8%, an acceleration from the 0.4% lift in the June quarter. It’s not unusual to see September quarters post relatively large increases in CPI as it captures the annual review in council rates (3% of the CPI basket). And this year, we’d expect to see a large increase. Providing a meaningful offset is deflation in the imported prices. Our forecasts are in line with the RBNZ’s expectations.

Earlier this year, we forecast inflation falling back within the RBNZ’s 1-3% target band in the September quarter – but only just (2.8%) given the persistent strength in domestic inflation. While that remains the case, we now see inflation falling closer to the midpoint of the target band. Because recent monthly price data have shown that strong downward momentum in imported inflation continues. Falling petrol prices leads the way.

A fast deceleration in imported prices has done most of the hard yards in bringing down headline inflation from the 7.3% peak back to the 2% target. Domestic inflation, in contrast, is a slow-moving beast. But it is now moving in the right direction (south). And the good news is, the return to 2% inflation will be sustained by the eventual normalisation in domestic price pressures. It’s the two phases of 2%.

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