NZ First Impressions: Consumers Price Index, Q1 2024

Consumer prices rose by 0.6% in the March quarter, leaving them up 4.0% over the past year. The total was a little below our forecast, but domestically-driven inflation remains surprisingly strong.

Consumers Price Index, March quarter 2024

• Consumer prices rose 0.6% in the March quarter, with prices up 4% over the past year.
• The result was a little below our forecast, but above the RBNZ’s last published projection.
• Imported inflation pressures are easing.
• However, domestic inflation pressures remain strong, and are much stronger than the RBNZ assumed. Non-tradables inflation is lingering at high levels long after the start of the RBNZ’s tightening cycle.

In the numbers

• Quarterly change: +0.6%
• Westpac forecast: +0.8%, RBNZ (Mar MPS): +0.4%
• Market median: +0.6%, range +0.4% to. +0.8%
• Annual change: +4.0%
• Westpac forecast: +4.2%, RBNZ (Nov MPS): +3.8%, Market: +4.0%

Non-tradables

• Quarterly change: +1.6%
• Westpac forecast: +1.4%, RBNZ (Mar MPS): +1.1%
• Annual change: +5.8%

Tradables

• Quarterly change: -0.7%
• Westpac forecast: -0.2%, RBNZ (Mar MPS): -0.8%
• Annual change: +1.6%

Discussion

Consumer prices rose by 0.6% in the March quarter. That saw the annual inflation rate dropping to 4.0%, down from 4.7% at the end of last year.

The result was below our forecast for a 0.8% rise.

The March quarter inflation result was above the RBNZ’s last published forecast for a 0.4% rise. However, the RBNZ’s forecast was finalised back in February (before the release of the monthly price data), and in its April policy review the RBNZ signalled they were already braced for a higher result.

However, the devil was in the detail.

The softness in today’s result was entirely due to lower tradable prices, with falls for items like used cars and apparel. That saw tradable prices falling 0.7% over the quarter, with annual tradables inflation falling from 3.0% at the end of 2023 to 1.6% now.

In contrast, non-tradables inflation was hotter than we or the RBNZ had expected. Non-tradable prices were up 1.6% over the quarter – higher than our own forecast (+1.4%) and much higher than the RBNZ’s forecast for a 1.1% rise. Upside surprises to our forecast were spread across the economy. On an annual basis, non-tradables inflation remains elevated at 5.8%. Notably, non-tradables excluding construction costs remains elevated at 6.3% and has eased only slightly since the RBNZ first raised the OCR back in 2021.

Core inflation measures have been dropping back, but remain elevated at rates of over 4%, consistent with lingering strength in domestic prices. Measures of domestic core inflation continue to hover around 6%.

In the detail

• Underpinning March’s lift in prices was a 6.5% rise in tobacco prices (related to the annual increase in tobacco prices).
• We also saw a solid 1.2% increase in housing rents.
• The cost of purchasing a newly built home was up 0.8% over the quarter. That’s much lower than seen over the past few years, but still a firm rise.
• We also saw firmness in recreational costs, including a large increase in overseas accommodation costs corresponding to the Taylor Swift concerts in Australia (aka. Swiftflation).
• On the downside, we saw sizeable falls in the prices of many imported items including used cars, fuel and apparel.

Implications

The divergence between the domestic and imported components of inflation illustrate the big concerns that the RBNZ is trying to balance. Inflation is coming down, and that will be important for stabilising inflation expectations.

However, domestic inflation is still running at rates that are much higher than the Monetary Policy Committee is comfortable with two years after the hiking cycle began. And it continues to look ‘sticky’. As a result, rate cuts won’t be on the table in the near term.