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UPDATE: NZ annual inflation slows to 1.1%

Article – BusinessDesk

April 19 (BusinessDesk) – New Zealand’s annual inflation fell near to the bottom of the Reserve Bank’s target band in the first quarter but is unlikely to concern the central bank, given it was largely due to cheaper tertiary education costs.UPDATE: NZ annual inflation slows to 1.1% as cheaper education offsets higher tobacco prices

(Recasts lede, adds economists comment from paragraph four)

By Rebecca Howard

April 19 (BusinessDesk) – New Zealand’s annual inflation fell near to the bottom of the Reserve Bank’s target band in the first quarter but is unlikely to concern the central bank, given it was largely due to cheaper tertiary education costs.

The consumers price index rose at an annual pace of 1.1 percent in the three months ended March 31, slowing from a pace of 1.6 percent in the December quarter, Statistics New Zealand figures showed. CPI rose 0.5 percent in the quarter. The result was in line with economists’ expectations and compared to the Reserve Bank’s quarterly projection of 0.6 percent and 1.1 percent annually.

The Reserve Bank is mandated with keeping annual inflation between 1-and-3 percent over the medium term with a focus on the mid-point. However, inflation has remained stubbornly weak and the central bank has signalled the official cash rate is likely to remain at a record low 1.75 percent “for a considerable period” given the lack of inflationary pressure.

The next rate review will take place May 10 and will be the first with new governor Adrian Orr at the helm, who must give regard to employment when setting monetary policy under his policy targets agreement. Today’s data, however, didn’t shake the view that the central bank won’t be lifting rates anytime soon.

“Today’s result reiterates our view that the RBNZ will leave the OCR on hold well into 2019,” said ASB Bank chief economist Nick Tuffley. ASB expects the first rate increase to come in 2019.

Paul Dales, chief Australia and New Zealand economist at Capital Economics, said the dip in annual inflation was due to the introduction of ‘fees-free’ first-year tertiary education policy rather than the influence of cyclical factors.

Stripping out that factor, inflation is still tepid and “looking ahead, as we doubt that growing capacity constraints and the rising minimum wage will boost CPI inflation much, we suspect the RBNZ won’t raise interest rates as soon as the markets expect. Lift-off may not happen until the back end of next year,” said Dales.

Westpac Banking Corp senior economist Michael Gordon said the slower annual pace is likely to be temporary as a lower New Zealand dollar will eventually give a boost to tradables prices, and the comparison with prices a year ago will favour a higher inflation rate over the next few quarters. However, “we don’t expect inflation to make it into the upper half of the 1-3 percent target range any time soon.”

The annual tobacco levy increase on Jan. 1 lifted quarterly inflation with prices for cigarettes and tobacco up 10.7 percent on the year and 10.5 percent on the quarter. “The average price for a packet of 25 cigarettes was $35.14 in March compared with $31.68 last December,” said Stats NZ prices senior manager Paul Pascoe. The average price was $13.46 in the March 2010 quarter.

Prices for tertiary education, meanwhile, fell 16 percent in the March quarter. The slide was the first fall in the series since 2003 and was due to the introduction of the government’s fee-free first-year policy.

Housing-related prices continued to increase and were the largest upwards contribution to the 1.1 percent CPI increase in the year ended in March. The housing and household utilities group lifted 0.6 percent on the quarter and 3.1 percent on the year.

Actual rentals for housing rose 0.6 percent on the quarter and 2.1 percent on the year. Regionally, rents increased 2.5 percent and were up 4.2 percent in Wellington.

Construction prices, meanwhile, increased 4.7 percent on the year and 0.4 percent on the quarter. According to Stats NZ, it was the smallest quarterly rise since the March 2011 quarter.

“Rising building prices in Auckland and Wellington have begun to slow. Both were up 0.3 percent in the latest quarter,” said Pascoe, adding it was the smallest rise in Auckland since December 2012.

Property rates and related services were unchanged in the quarter for a 3 percent annual increase.

Household energy prices, which includes electricity, gas and solid fuels, rose a quarterly 0.8 percent and an annual 2.7 percent.

Food prices, meanwhile, lifted 0.5 percent on the quarter and 0.6 percent on the year, the statistics agency said.

Stats NZ said that higher prices for accommodation and petrol also contribute to the quarterly CPI rise, but were offset by seasonal falls for international airfares.

Tradables CPI, which includes goods and services that compete with international rivals, fell 0.1 percent in the quarter and slipped 0.4 percent on the year, weighed down by lower prices for audio-visual equipment and international air transport. This was partly offset by higher prices for petrol. Non-tradables inflation, which focuses on domestic goods and services, rose a quarterly 0.9 percent for a 2.3 percent annual increase. The annual increase was driven by higher prices for cigarettes and tobacco, construction and rent.



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