Today’s inflation release showed a solid 0.5%qoq gain to end 2019, taking the annual run rate to 1.9%. We had forecast a
0.3%qoq gain (1.7%yoy), and consensus was a touch higher at 0.4% (1.8%). But, more importantly, the print came in
slightly above the RBNZ’s conservative 0.2% (1.6%) guesstimate. Food prices fell, as expected, over the quarter.
The lion’s share of the increase in inflation came from transport related costs, including international and domestic
airfares, accommodation, and of course petrol. Housing related costs, namely rent, also increased a chunky 0.5% over the
last quarter. Tradables inflation bounced from -0.7%yoy to +0.1%yoy. Non-tradables, the domestically generated inflation
eased to 3.1%yoy, from 3.2%yoy. The core measures of inflation lifted to 2%, slightly above the headline print of 1.9%,
and suggests there’s some inflation in the pipeline.
The RBNZ will take a some comfort in the report, compared to their estimate, and sit comfortably on hold for the time
being. But the jury is out on the direction from here. Will inflation hold at the coveted 2% level? Tradables inflation
was a key driver of December quarter inflation. But tradables inflation tends to be transitory in nature. Transport
price movements, particularly petrol, are among the most fleeting price signals. As we explained in our 2020 outlook
note last month, see My delirium: awaiting fiscal support at precisely the right moment in history, we expect inflation to temporarily shoot up to 2% in the first half of 2020, before easing back. From the second half
of 2020 we expect only a very gradual rise back to the RBNZ’s 2% inflation target midpoint. And a lot needs to go right
for prices to get there.
Inflation is not guaranteed to hold up around the RBNZ’s target midpoint. Combined with ongoing downside risk factors,
such as global trade tensions, we maintain our view that the RBNZ will deliver an OCR cut to 0.75% around the middle of
the year.