Consumer Price Index (Q2 2002)

Data Flash (New Zealand)
Consumer Price Index (Q2 2002)

Result: The headline CPI rose by 1.0% qoq in Q2, in line with expectations. Encouragingly, the CPI showed relatively modest price pressure in the housing market, but some pressures are evident in parts of the service sector.

Implication for markets: Deutsche Bank continues to expect a 25bp rate hike on 14 August, taking the OCR to 6%.

The data

The CPI increased by 1.0% qoq in Q2. That lifted the annual rate of inflation to 2.8% from 2.6%.

The result was exactly in line with DB and market expectations, while the RBNZ's 15 May forecast was only a shade higher (+1.1% qoq).

The key upward contributions were a 9.9% rise in petrol prices (adding 0.33pps to the result) and a 9.9% qoq rise in international airfares (adding 0.23 pps), which together accounted for over half of the total rise. Smaller upward contributions came from a 1.9% rise in electricity prices (+0.05 pps), a seasonal 12.1% increase in stationery prices (+0.05 pps), a 1.1% excise-tax driven increase in alcohol prices (+0.07 pps), and a weaker than expected 0.6% increase in house purchase and construction costs (+0.06 pps).

The key downward contribution came from lower food prices, due a 3.1% qoq fall in fruit and vegetable prices and a 1% qoq in meat prices.

Analytical inflation measures:

tradeables inflation was 1.4% qoq (0.0% in Q1), with the annual rate unchanged at 2.5%.

non-tradeables inflation was 0.6% qoq (1.2% qoq in Q1), lifting the annual rate to 3.0% from 2.6%.

the CPI excluding fresh fruit and vegetables, petrol, and the effect of policy changes rose by 0.8% qoq (+0.0% qoq in Q1). The annual rate rose to 3.1% from 3.0%;

the weighted median of quarterly price changes was 0.6% qoq (+0.7% qoq in Q1); the weighted median of annual price changes rose to 3.0% from 2.6% in Q1.

Commentary

RBNZ's inflation view unchanged

The RBNZ's view of the degree of underlying inflation pressure in the economy is unlikely to have changed greatly as a result of today's CPI release. The aggregate result was just 0.1pp weaker than the RBNZ's forecast of 1.1% qoq (printed in the Monetary Policy Statement of 15 May). Looking at the detail, the Bank will likely have taken some comfort that dwelling rentals costs and house purchase and construction costs were relatively subdued, especially with there now being some signs that activity levels in the housing market have peaked. The risk of a repeat of the very high inflation recorded in this sector during the mid 1990s therefore seems to be receding. Offsetting that good news, however, were signs of some inflation pressure in parts of the service sector (eg in the personal and health care group), while most measures of core inflation remain at relatively high levels (albeit influenced heavily by `non-market' factors, such as restructuring in the energy and insurance industries).

Our preliminary forecast for the Q3 CPI is 0.6% qoq. Such an outcome would see annual inflation fall marginally to 2.7%. A more substantive decline seems unlikely to take place until 2003, when weaker commodity prices and the strengthening exchange rate should begin to drive inflation lower. As the RBNZ acknowledged in its 3 July statement, the outlook for inflation does look a little more benign than the Bank projected back in May. But with measures of skill shortages and capacity use remaining at relatively high levels, the Bank's bias will be to tighten monetary conditions a little further yet.

RBNZ still expected to hike on 14 August

Looking ahead to 14 August, Deutsche Bank's continues to expect a 5th consecutive 25bp rate hike, taking the cash rate to a broadly neutral 6% (70% probability). The prospects for further rate hikes thereafter will depend on how current uncertainty about the US economy is resolved, the extent to which sliding confidence begins to impact on domestic demand, and the extent of changes made to the RBNZ's Policy Targets Agreement when a new Governor is appointed (most probably in September/October).

Ends

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