Inflation falls to 4.7%, but domestic price pressures remain high

Wednesday, 24 January 2024

Annual inflation fell faster than the Reserve Bank had predicted to 4.7% in the three months to the end of December, in line with the expectations of bank economists.

However, Infometrics principal economist Brad Olsen didn’t believe the fall would give the central bank cause to change its hawkish narrative on interest rates.

Inflation fell sharply from the annual rate of 5.6% previously reported in the September quarter, as overall prices increased by only 0.5% quarter-on-quarter, Stats NZ reported on Wednesday.

The Reserve Bank had forecast in November that the December-quarter annual inflation rate would come in at 5%.

However, the latest drop in inflation was largely driven by a drop in the prices of imports such as petrol and other goods and services whose prices are mainly determined by international markets.

The prices of those so-called “tradeable” goods and services fell by 0.2% quarter-on-quarter, from a rise of 1.8% previously, bringing the annual rate of tradeable inflation down to 3%, from 4.7% previously.

The inflation rate for so-called “non-tradeable” goods and services, which include rents and other goods and services that are determined by domestic pricing pressures also fell quarter-on-quarter but only to 1.1%, from 1.7%.

That trimmed the annual rate of non-tradeable inflation to 5.9%, from 6.3% in the September quarter.

The Reserve Bank has consistently indicated it is more concerned by non-tradeable inflation, which is the type of inflation that it can best influence through its monetary policy settings.

The Reserve Bank is currently forecasting that it won’t begin reducing the official cash rate from its current level of 5.5% until well into next year, and its predictions have even raised the possibility of one more rate rise early this year, to 5.75%.

That is despite a widespread assumption in financial markets that the cutting cycle will begin later this year.