Inflation drops to 4%, but economists see glass half-empty

Wednesday, 17 April 2024

Economists are warning of devil in the detail of a big drop in inflation reported by Stats NZ.

Annual inflation dropped to 4% in the year to the end of March, sharply down from the rate of 4.7% recorded for the 2023 calendar year, according to Stats NZ’s estimates.

But Capital Economics economist Abhijit Surya warned the figures showed domestic inflationary pressures still running strong.

Meanwhile, there are concerns the prices of international commodities, which have been falling and which are mainly responsible for easing inflation here, could be about to resume an upward tick.

Moody’s Analytics said moderating food prices and to a lesser extent transport prices were behind the easing in headline inflation.

But it said that behind that there were “a few worrying trends”, such as strong population growth and weaker construction activity driving rents higher.

Similarly, ANZ said there was a “strong underbelly” to the latest inflation figures which it believed would concern the Reserve Bank.

“The details presented a much less convincing story of underlying disinflation than meets the eye,” it said.

“With the recent moves higher in oil prices and the re-emergence of shipping disruption likely to add upwards pressure in the coming quarters, there remain plenty of risks to the outlook.”

The Reserve Bank forecast when it issued its last monetary policy statement in February that annual inflation would have dropped even more by now, to 3.8%.

But the actual headline figure was towards the lower end of most economists’ more recent predictions.

ANZ had forecast annual inflation would fall to 4%, while ASB had expected it would come in at 4.1%, and Westpac and Kiwibank had tipped 4.2%.

Stats NZ manager Nicola Growden said the quarterly increase in the Consumer Price Index, measured at 0.6%, was the lowest it had been since June 2021.

Rents and rates remained a blackspot.

Stats NZ reported that rents rose 4.7% in the year to March, while rates were up a hefty 9.8%.

Rising prices for overseas accommodation booked by Kiwis and the likes of Netflix subscriptions contributed to a 9.7% annual rise in the price of recreational and cultural services.

Higher prices for cigarettes, tobacco and alcohol were noteworthy contributors to the 0.6% rise in the Consumer Price Index in the most recent quarter, Stats NZ said.

The inflation figures were helped by a drop in the price of petrol and international airfares and are not expected to change the Reserve Bank’s view that it need now only “watch and wait” for inflation to fall further before considering rate cuts.

But the downsides in the latest data have left economists remaining divided on whether to expect the Reserve Bank to begin cutting the official cash rate from 5.5% towards the end of this year, or not until next year.

So-called “tradeable inflation” which attempts to measure the changes in the price of goods and services whose prices are determined internationally, such as fuel, rose by a lowly 1.6% in the year to March and actually fell 0.7% in the latest quarter.

However, nervousness over fuel prices has increased in the past week as a result of the exchanges of fire between Israel and Iran.

ANZ warned prior to Stats NZ’s announcement on Wednesday and again afterwards that while progress was being made on inflation, there was potential for inflationary pressures to re-emerge globally.

That meant the Reserve Bank was likely to remain cautious on the future track of interest rates, ANZ said.

Stats NZ estimated “non-tradeable” inflation, which attempts to reflect domestic inflationary pressures and which tends to more greatly concern the Reserve Bank, at 5.8%.

That was down only slightly on the 5.9% rate it recorded for the year to the end of December, with the latest quarterly rise a still-troubling 1.6%.

That appears to be concerning most bank economists more than the possible re-emergence of global inflationary pressures at this stage.

When looked at on a quarterly basis, non-tradeable inflation was heading in the wrong direction, ANZ said.

“Domestic inflation pressures remain acute, particularly concentrated in services sectors.

“These are the sticky components which are likely to show persistence moving forward and continue to imply a more gradual easing of inflation than the Reserve Bank has anticipated.”

At 4%, the overall annual inflation rate continues to run higher in New Zealand than in most countries economists tend to compare the country with.

Annual inflation was last measured at 3.4% in Australia and the UK, 3.5% in the United States, and 2.8% in Canada and Japan as well as in the European Union, Stats NZ reported.