Annual inflation higher than expected
Annual inflation has come in significantly higher than expected at 1.4 per cent in the December quarter, Stats NZ has reported.
The annual rate is unchanged from the September quarter but economists had been expecting a drop. The surprise may be bad news for the housing market as the figure is fuelling further doubts that the Reserve Bank will cut the official cash rate (OCR) below its current level of 0.25 per cent this year.
Westpac economist Michael Gordon said the inflation figure was ‘‘a much stronger result than expected’’ and made an interest rate cut less likely. As of Thursday, Westpac has no longer been forecasting a cut in the rate.
Kiwibank economist Jarrod Kerr also cancelled its expectation of a rate cut, saying it ‘‘now expected the official cash rate to be left unchanged, well into 2022’’.
‘‘The rampant advances in the housing market have surely taken a negative cash rate off the table.’’
ANZ had forecast annual inflation would dip to 1.2 per cent, with a 0.3 per cent rise in the consumer price index in the quarter, while Westpac and BNZ had tipped the annual rate to fall to 1 per cent.
ASB and the Reserve Bank had been forecasting 1.1 per cent.
Stats NZ said higher prices for accommodation, new homes and used cars resulted in a 0.5 per cent quarter-on-quarter rise in the consumer price index (CPI).
‘‘On a quarterly basis, domestic accommodation services were the top contributor to the CPI increase, up 20 per cent in the December quarter, despite the impact of the Covid19 pandemic on international tourism.’’ The figures indicate the loss of international tourists has not made holidaying in New Zealand cheaper for Kiwis. Gordon noted prices for domestic accommodation were higher than a year ago, pre-Covid, ‘‘despite the absence of overseas tourists’’. Westpac still expected inflation to ‘‘remain on the lower side’’ of the Reserve Bank’s target over this year. ‘‘For us, the surprise was largely on the tradeables side and in particular for big-ticket imported items. With overseas holidays out of the question, many people have diverted their spending towards items such as cars, furniture and electronics,’’ Gordon said.
‘‘At the same time, imports have been disrupted for various reasons, leading to shortages of some items.’’ Westpac had made some allowance for this effect in its forecast, he said. ‘‘But it proved to be much larger than anticipated. It is likely some of these price increases will prove temporary, as the supply chain is eventually ironed out.’’
ASB economist Mark Smith came to a similar conclusion. ‘‘We expect annual headline inflation to ease early this year but to gradually firm thereafter, with more upside risk now accumulating to the inflation outlook. The diminished risk of deflation suggests the OCR is unlikely to move lower from its current 0.25 per cent low.’’
The Reserve Bank was likely to maintain ‘‘highly stimulatory settings’’ until it was confident economic activity and the labour market had turned the corner, Smith said.
‘‘Our view is that the OCR is unlikely to move up in 2021 but the resilient tone of New Zealand data is a reminder that the OCR won’t stay at record lows forever.’’
ANZ is forecasting one more rate cut to 0.1 per cent this year but said the inflation announcement ‘‘does pose some risk that the Reserve Bank does not need to cut the OCR further if momentum in the economy can be maintained’’.
Infometrics economist Brad Olsen put the inflation surprise down to supply chain issues, capacity constraints ‘‘and a return to more usual levels of economic activity’’. ‘‘This higher inflation rate should all but close the door on any further easing in monetary policy in the first half of 2021,’’ he said.
‘‘It is likely some of these price increases will prove temporary.’’ Michael Gordon
Westpac economist