Inflation rate drops to 4%

Wednesday, 17 April 2024

Inflation is coming down but there are still pain points.

The Reserve Bank has been battling inflation with higher interest rates.
It expects that it will return to its 1% to 3% target band by the end of the year.
Stats NZ said rents were a problem - rising at the highest rate since the series began in 1999.

Inflation as measured by the consumer price index (CPI) has dropped again, Stats NZ data shows.

Its figures for the March quarter show prices lifted 4% in the year. It follows a 4.7% annual increase in the year to December.

Nicola Willis says NZ in same position as a household living beyond its means.

For the quarter, prices rose 0.6%. The Reserve Bank had forecast a quarterly increase of 0.4%.

“Price increases this quarter are the smallest since June 2021. However, they remain above the Reserve Bank of New Zealand’s target range of 1% to 3%,” consumers prices senior manager Nicola Growden said.

Housing and household utilities was the largest contributor to the annual inflation rate. This was due to rising prices for rent, construction of new houses, and rates.

Rent prices increased 4.7% in the 12 months, while construction of new houses and rates increased 3.3% and 9.8%, respectively.

“Rent prices are increasing at the highest rate since the series was introduced in September 1999,” Growden said.

The next largest contributor to the annual increase was recreation and culture, due to rising prices for international accommodation, and cultural services, which includes items like subscription TV, cinema tickets, and zoo admission.

Jarrod Kerr, chief economist at Kiwibank, said the details were not as good as the headline number made it appear.

“The decline in price pressure came from offshore. Tradables inflation fell to 1.6%…That’s great, we’ll take it. But the domestically generated inflation surprised on the upside. Non-tradables fell just 0.1% to 5.8%. It’s not enough.

“The stuff the Reserve Bank is trying to restrain, is proving to be even more frustrating. Services inflation actually lifted to 5.3% from 4.7%. Whereas construction costs did a little more, falling from 4.8% to 4.5%.”

ANZ economists also highlighted this as a concern. The Reserve Bank had forecast an annual rate for non-tradeables of 5.3%.

“The quarterly seasonally adjusted non-tradables impulse reaccelerated to 1.5%, well above the 0.8% level historically consistent with headline inflation at 2%, and going in the wrong direction.”

Kerr said the underlying trend would be the most important thing for the Reserve Bank.

“Encouragingly, progress continues. Core inflation – removing volatile prices – appears to have peaked in late 2022, and currently sits at 4.1%. The core measure was unchanged to 4.1%, whereas we had expected a slight fall. We expect the downtrend to recommence next quarter.”

But ASB economists said they thought the data would mean the Reserve Bank would hold off on interest rate cuts until next year.

“While some of the price increases remain outside of the Reserve Bank’s control, it will want to see more sustained evidence that non-tradable and core inflation will fall below 3%.”

This latest data highlighted that the last per cent or so, to get back to the target band, could be “hard won”, they said.

“We don’t think the data suggest the Reserve Bank needs to do more, so to speak. Activity data are very weak and highlight that monetary policy is working. However, absent more pronounced evidence that domestic and core inflation measures are heading back to target, there is a risk that the Reserve Bank joins the slower to lower camp of central banks. As a result, we think the Reserve Bank will wait until February 2025 to cut the OCR.”