Consumer prices rose 1.2% in the March quarter and are up 6.7% over the past year. The March result was below our forecast, and much lower than the RBNZ’s expectation.
Consumers Price Index, March quarter 2023
Quarterly change: +1.2% (prev: +1.4%)
- Westpac: +1.5%, RBNZ (February MPS): +1.8%
- Median market f/c: +1.5%, range +1.3% to +1.8%
Annual change: +6.7% (prev: +7.2%)
- Westpac: +6.9%, RBNZ: +7.3%, Market f/c: +6.9%
Key points
New Zealand consumer prices rose 1.2% in the March quarter, with prices up 6.7% over the past 12 months.
Today’s result was lower than market expectations, and well below the RBNZ’s forecast for a 1.8% rise.
Annual inflation remains painfully high. However, inflation looks like it has now peaked.
Core inflation, while still high, is not pushing higher.
Today’s result supports our forecast for just one more OCR hike from the RBNZ in May.
Details
The March quarter saw large price swings in some specific areas:
- Food prices rose by 3.7% over the March quarter and are up a massive 11% over the past year. In part, that strength was due to disruptions stemming from January’s storms and Cyclone Gabrielle, which resulted in significant damage to some crops. There have also been large increases in the prices of items like groceries (including eggs).
- March quarter inflation was also boosted by the annual increase in the tobacco excise tax, with cigarettes and tobacco prices up 7.6%.
- Providing some offset to those increases has been the fall in petrol prices, with prices at the pump dropping by around 2.6% in recent months.
But while there were some large swings in some specific prices, the big takeout for the BNZ was core inflation. The various measure of core inflation (which smooth through the quarter-to-quarter swings in prices and track the underlying trend in inflation) remain high at around 6%. Crucially, however, they are not continuing to push higher.
This is an important development for the RBNZ. Interest rates have been on the rise for over 18 months. Although price pressures still remain very strong, we’re now seeing signs that the rise in prices is starting to lose some steam.
Digging under the surface, the March quarter saw softness in the prices of a range of imported durable items like furnishings. That’s consistent with anecdotes from retailers of softening demand.
Looking across the broad product groups, domestic (or non-tradable) prices were up 1.7% in the March quarter and have risen by 6.8% over the past year. That’s still very strong, but lower than the RBNZ had expected.
Prices for imported goods (sometimes referred to as tradables) rose by 0.7% over the past three months and are up 6.4% over the past year. That’s a big step down from the rates we saw earlier in the year.
What does today’s result mean for the RBNZ?
We’re forecasting another 25bp increase in the Official Cash Rate at the RBNZ’s May policy meeting. Inflation is still running red-hot and it remains well outside the central bank’s target range.
However, it’s looking increasingly likely that May will be the last rate hike in the current cycle. Inflation has fallen well short of the RBNZ’s forecasts for a second quarter, and there are signs that underlying inflation pressures have peaked and may be starting to ease. Those developments come on top of softening demand in sectors such as construction. Together these are important indications that the policy tightening over the past 18 months is at last having the intended dampening effect.
More details to follow in our Bulletin later today.
