New Zealand’s headline inflation slows less than expectations in Q3, RBNZ to cut rates in November

New Zealand’s headline CPI inflation came in slightly above consensus projection in the third quarter. The September quarter inflation slowed to 0.2 percent sequentially, as compared with consensus projection of zero percent and slightly above the central bank’s 0.1 percent quarter-on-quarter pick. However, on a year-on-year basis, inflation dropped to 0.2 percent, the eighth straight quarter below 1 percent.

As widely projection, one-offs added to the weakness of the headline print. Private transport services dropped 28 percent due to lower motor vehicle relicensing fees that subtracted 0.3 percentage points off headline inflation in spite of its small weight.

Prices of tradable remained flat in the third quarter, whereas that of non-tradable increased modestly by 0.3 percent sequentially and 2.1 percent year-on-year. However, excluding the effect of central and local government charges, annual non-tradable inflation rose 2.7 percent year-on-year, the highest since the first quarter of 2014 and in line with rising capacity pressures in the New Zealand economy.

Prices of petrol partially reversed the rise seen in the second quarter. It dropped 1.7 percent in sequential terms, subtracting 0.1 percentage points from the headline CPI print. On the other hand, prices of food increased 0.4 percent in sequential terms.

A huge positive contribution to the headline print was again given by the housing group that recorded a rise of 1.1 percent. ‘Construction costs’ increased further by 2 percent quarter-on-quarter after the second quarter’s 2.1 percent surge. In this measure annual inflation has increased to 6.3 percent, with Auckland in the lead.

Surprisingly, there was not much evidence of weakness in retail price than was anticipated. Certain components surprised significantly on the upside. Consumer contents and services prices increased 2.3 percent sequentially with widespread gains.

Prices of audio visual equipment were up for the first time since the fourth quarter of 2001. Meanwhile, the 1.8 percent sequential decline in telecommunication equipment prices was the smallest in 12 months, noted ANZ. It is uncertain if this is lagged impact of early falls in NZD or signs that retailer are regaining certain pricing power. The CPI excluding fuel, food and energy rose slightly to 1.1 percent year-on-year.

It is evident that domestic price pressures are rising slowly as capacity strains come up. However, decent rises in price are greatly restricted to housing. The CPI inflation data was not far from the central bank’s projection and would not be in the way of RBNZ lowering the OCR again in November, according to ANZ.