Inflation set to disappoint Reserve Bank, forecasters say

Monday, 15 April 2024

The Reserve Bank is trying to get inflation down to its target range.

Stats NZ will release consumer price index (CPI) data for March this week.
Economists say it is likely to show price increases of 0.6% to 0.8% in the quarter.
The Reserve Bank had forecast less.

Economists are expecting to see another drop in the annual inflation rate this week - but not as much as the Reserve Bank would like.

Stats NZ will provide an update on the consumer price index (CPI) for the March quarter.

The Reserve Bank said last week it expected it to return to its target band of 1% to 3% by the end of the year.

ANZ economist Henry Russell said he expected the CPI rose 0.6% in the quarter, which would take the annual rate to 4%.

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The Reserve Bank had forecast a quarterly increase of 0.4%.

Russell said he expected that domestic inflation was running at a rate of 1.3% in the quarter.

“However, weakness in activity and the emergence of spare capacity across the economy, particularly in the labour market, should be sufficient for the Reserve Bank to tolerate near-term strength, given our assessment of a pipeline of domestic disinflation ahead.”

Imported inflation was likely to come in at a rate of -0.4% in the quarter, he said. That was less of a drop than the Reserve Bank expected but “still weak as the post-Covid supply-side normalisation continues”.

“All up, disinflation progress is occurring more slowly than the Reserve Bank anticipated, but progress is being made.

“However, given a potential reemergence of global inflation pressures the Reserve Bank is likely to remain cautious amidst the uncertainty. Inflation at 4% would still be double the target midpoint, and there is still a risk that inflation stabilises above target. Until the Reserve bank has seen concrete evidence that domestic inflation pressures are beaten it likely won’t take any chances by easing policy settings too proactively – nor by even suggesting that it might.”

Gareth Kiernan, chief forecaster at Infometrics, said the rate for the quarter was likely to be 0.8%.

“There’s a moderating trend in price pressures across the board, and the March data suggests that some of the areas of concern in the February numbers were a bit of a flash in the pan, rather than any indication of more persistent or lingering inflationary pressures. Nevertheless, the Reserve Bank will be keen to see more of a reduction in non-tradable inflation than we’ve had to date.”

He said concerns around shipping costs emanating from the Red Sea had largely dissipated. But there was heightened concern around oil prices given the potential escalation of Israel’s conflict to start incorporating other countries such as Iran.

“There’s obviously nothing the Reserve Bank can do about that directly, but in an environment where there’s still more acceptance of price rises than pre-Covid, they’ll be wanting to keep inflation expectations under control and minimise any second-round effects of higher fuel prices across the CPI more broadly.”

Mark Smith, at ASB, said he expected the Reserve Bank was correct that inflation would fall below 3% before the end of the year.

“Our expectation is that core inflation will continue to cool and that the Reserve Bank will be sufficiently confident to cut the OCR when the core inflation trajectory points to generalised inflation settling below 3%. This is unlikely to be until the November MPS, and perhaps later.”

Kiwibank economists said the worst was over when it came to domestic inflation, and it should fall to an annual rate of 5.4%.

“While all eyes will zero in on the headline print, the underlying trend is perhaps more important.

“Core inflation – removing volatile prices – appears to have peaked in late 2022, and currently sits at 4.1%. We expect the downtrend to continue. But it’s still a long way back to target. Going forward, the path for policy is the path for inflation. We expect inflation to return to within the Reserve Bank’s 1% to 3% target by the September quarter. But we don’t see that in writing until mid-October. That leaves November as the earliest kick-off date for rate cuts.”