Inflation is still low, but headed higher

It might have been cheaper to upgrade the car, just less so to add to the house.
Key Points
• Food, alcohol, construction, and rents all surprised slightly on the high-side.
• Petrol rose, and will rise some more. Used cars were heavily discounted. Our tradables (imported) basket was weaker than we thought.
• Non-tradables inflation, domestically generated, was slightly stronger. The RBNZ is on hold.

Summary

June quarter CPI inflation came in at 0.4% qoq, just shy of our forecast of a 0.5% qoq rise, but in line with the RBNZ’s forecasts produced back in May. On an annual basis inflation rebounded to 1.5% yoy from the 1.1% yoy trough recorded in March quarter, and we expect inflation will continue to lift from here. Inflation in the quarter was driven by food, alcohol, and housing-related price rises. The main surprise among the figures was a much weaker-than-expected lift in transport-related prices, with the group only 0.2% qoq higher compared to a 1% qoq lift expected. Fuel prices were higher in the quarter on the back of further increases in global oil prices and a weaker currency. But discounting on used vehicles partly offset the rise in petrol prices. Despite softer transport prices, tradables inflation still managed to rise 0.3% qoq, and follows back-to-back quarterly declines. Non-tradables or domestic inflation continues to steer the headline figure up 0.4% in the quarter and 2.5% yoy.

There was nothing in today’s report to convince us to change our view. The RBNZ is still some way off from beginning to gradually hike the OCR – we think in about a year’s time. Measures of underlying inflation were a little stronger in today’s report, but remain subdued. And while there was much focus on Today’s inflation report, we think of more interest will be next quarter. The September quarter includes the introduction Auckland’s regional fuel tax, and further weakness in the currency. Today’s figures are likely to give the RBNZ some comfort that its view remains valid.

The inflation print is one of the most important statistical releases we have. CPI is the most glamourous of statistics – glamour being a relative term here. The RBNZ targets 1-to-3%yoy on average over the medium term, with a clear focus on the 2% midpoint. 2% yoy is an inflation rate most developed market central banks aspire to meet. We will get there, one day. If we’re not at 2% next quarter, we could be there the next. In other words, we should be back to 2% by year end. There will be no victory lap when we hit 2%, however. Inflation has been too weak for too long. So letting it run a little above 2% for a period would be prudent management. We’re not sure inflation will even last at or above 2% for long. Best we wait and see.

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