New Zealand Inflation Surprises To The Upside In Q4 2018

Summary

• Consumer prices rise by 0.1% during the three months ending December 2018
• New Zealand’s annual inflation rate at 1.9%
• Fuel prices drag consumer prices lower
• Inflation pressure is stronger than expected
• RBNZ’s rate cut prospects diminish

New Zealand’s fourth-quarter inflation report for 2018 showed that the era of low inflation should end. The annual inflation rate scores near the 2.0% inflation mid-point target set by the RBNZ.

Consumer prices posted a modest increase as fuel prices dragged lower, but inflationary pressures on the domestic front turned out stronger than expected by the RBNZ’s recent forecasts.

Although the latest inflation data are negligible, the prospects of inflation inching higher were positive news. New Zealand’s consumer prices are yet to test the upper end of the inflation target band of 3.0% before the prospects of a rate hike are back on the table.

For the moment, the increase in inflation is likely to see the markets scaling back their speculation of a rate cut from the RBNZ.

Consumer prices see a slight increase

Consumer prices in New Zealand rose by  0.1% which was slightly above the median estimates of a no change that was forecasted. However, headline inflation increased at a weaker pace following a 0.9% increase seen during the third quarter of last year.

The increase in inflation came as it reflected the seasonal factors as well. Vegetable prices fell 21% from their peak in the previous quarter. This decline outweighed other sectors such as airfares, car rentals, and accommodation. On a seasonally adjusted basis, New Zealand’s inflation rose 0.4% during the three months ending December. This represents almost the same pace of increase compared to the previous quarter.

The latest inflation data was also somewhat below the RBNZ’s forecasts. In the November monetary policy statement, the RBNZ forecast that inflation would rise 0.2% in the December quarter. Fuel prices fell sharply during the reported period. The declines in fuel prices, however, came about after the RBNZ’s forecasts. The 0.4% decline in tradable inflation is soft in comparison to the RBNZ’s estimates of a 0.1% decline.

Although fuel prices decreased, the average during the December quarter was only limited. Fuel prices are down 8.0% since the start of the year in December on an average basis. This should reflect on the upcoming inflation reports.

Headline inflation should remain soft over the next few quarters at the very least. However, the declines are only temporary factors.

There was a modest pick up in the tradables inflation during the latest quarter. This came about due to the substantially weaker exchange rate of the New Zealand dollar throughout last year. A lower exchange rate should have a lagging impact on imported goods.

Services are also beating estimates

Prices of non-tradable goods and services however outperformed the forecasts and have been doing so since the past couple of quarters. During the December period, non-tradables rose by 0.7% and rose to an annual rate of 2.7%. This was the highest increase since June 2014.

This trend is expected to continue in the coming years as a tightening labor market, and government pay increases are expected to accelerate pushing wage costs higher. Firms reported higher cost pressures which are also likely to be passed on to consumers.

There is also a chance that inflation in the coming quarters could be higher. Statistics New Zealand reported that it would be using a methodology to calculate inflation. This new method will also include a new way to calculate rental prices. This should see a faster pace of growth in the overall measure of inflation.

Elsewhere, the price of newly built homes slowed from their highs in the previous months. This was in line as seen by the slowdown in the home sale prices due to the government efforts to clamp down on speculative buying in the real estate sector.