'Pleasant surprise' as annual inflation drops to 6.7%

Thursday, 20 April 2023

Infometrics says the inflation numbers may raise more questions about where to next for the Reserve Bank.

Annual inflation has plummeted to 6.7%, after prices rose only 1.2% in the three months to the end of March.

The drop in inflation was much larger than economic forecasters had been expecting and may raise questions over whether the Reserve Bank may have been engaging in “overkill” when it raised the official cash rate by 50 basis points to 5.25% earlier this month.

The Reserve Bank had been expecting annual inflation to rise to 7.3%, from 7.2% in the December quarter, when it made that decision.

Westpac had been the most optimistic predicting inflation would drop to 6.9%.

Other banks had been expecting the rate to come in at either 7.1% or 7.2%.

* ANZ and ASB forecast inflation will remain stuck at 7.2%

* Food prices jumped 12.1% in March compared to same time last year

The path back to low inflation - Reserve Bank of New Zealand chief economist Paul Conway. (First published March 23, 2023)

The average price of non-tradeable goods and services, which are those whose prices are largely determined within New Zealand, rose 6.8% over the year, which was in line with ANZ’s forecast and the highest increase since Stats NZ began gathering comparable statistics in 1999.

But the big surprise was the size of the drop in tradeable or imported inflation, which crashed to 6.4%, from 8.2% in December, with the quarterly rise coming in at just 0.7%.

Stats NZ consumer prices manager Nicola Growden said that despite the overall drop, inflation was “still at levels not seen since the 1990s”.

ANZ also said that although the numbers were good in a relative sense, they were still bad in absolute terms.

Infometrics principal economist Brad Olsen said the figures were a pleasant surprise.

He did not believe the Reserve Bank would face too many questions about its past decisions, given it was “just one quarter”, but said the latest data did highlight that it was close to the end of the raising cycle.

“Inflation is 6.7%; it is not back to 3% yet, so they still have a job to do. But it may prompt questions as to where to next for the Reserve Bank.

“Prices are not falling, but are not rising as fast, and that is encouraging.”

Capital Economics economist Abhijit Surya said it expected the Reserve Bank to push though one more 25 basis point interest-rate hike next month despite the drop in inflation, noting that in additional to accelerating food prices, the price of education and other miscellaneous services “continued to edge up”.

Rising food prices, in particular for fruit and vegetables, are proving a fly in the ointment as the edge comes off inflation.

ANZ senior economist Miles Workman agreed, but said the figures should at least rule out another 50bp rate rise when the Reserve Bank released its next monetary policy statement on May 24.

Given domestically-generated inflation was at what he described as a record high, “we don’t think the sound of corks popping will be resonating through the Reserve Bank’s offices tonight”, he said.

Food prices were the biggest contributor to annual inflation. Stats NZ had previously reported that grocery food prices rose 13.7% over the year.

The price of new housing rose 11%, but that was down on the 14% annual increase recorded in Stats NZ’s December quarter release.

An 8.3% annual drop in petrol prices over the year helped mitigate those impacts.

The fuel price drop was the largest factor behind the drop in imported inflation, though an ironing out of glitches in international supply chains may also have helped.

There had been fears the impact of Cyclone Gabrielle could push up inflation, but excluding rising food prices, the average price of other goods and services rose 5.6%.

Credit ratings agency Moody’s concluded that the recent floods and cyclones had “not hampered the country’s fight against inflation as much as feared”.

“That said, the jump in non-tradeable inflation, where prices are largely determined by what happens within New Zealand’s borders, suggest pressures may be emerging,” it said.

Stats NZ said that when it excluded “extreme” price movements from its figures, prices rose between 5.9% and 6.1%, which it said suggested “underlying” inflation was lower than the headline 6.7% figure.

Finance Minister Grant Robertson said Cyclone Gabrielle would have contributed to food-price inflation in the quarter and could also be expected to have an impact on the June quarter numbers.

He noted that the prices of second-hand cars and insurance, which were also likely to have been impacted by the extreme weather, were also elevated.

The cost of living remained “the main challenge” facing the Government and would be a major focus in the May budget, he said.

National Party finance spokesperson Nicola Willis said it was ”a sad day when New Zealanders are being told to believe that annual price rises of 6.7% are somehow good news”.

March marked the “24th month of New Zealand inflation levels being out of control, even while interest rates have been pummelling Kiwis with ever blunter force”, she said.

ACT Party leader David Seymour said the fact tradeable inflation was falling and was now below non--tradeable inflation, which was rising, showed inflation was a “New Zealand problem” and that the cost of living crisis was due to “wasteful Government spending”.

Green Party revenue spokesperson Chlöe Swarbrick said the solution to the higher cost of living was “taxing wealth and excess profits and using that money to help people”.