Inflation climbs in March quarter

IJamie Gray

nflation perked up in the March quarter and appears destined to breach the Reserve Bank’s target of 2 per cent by mid-year, but that doesn’t mean interest rates are going anywhere, any time soon.

Higher prices for transport and housing drove the consumers price index up by 0.8 per cent in the March quarter, in line with market expectations.

It compared with a 0.5 per cent increase in the December quarter, Stats NZ said.

The annual increase was 1.5 per cent, still a way off the Reserve Bank’s 2 per cent target, but economists say it won’t be long before inflation breaks higher.

Some are picking annual inflation will hit 2.5 per cent mid-year.

The question is how long will that spike last. For the moment, the view is that it won’t.

The Reserve Bank had forecast a quarterly gain over the March quarter of 1 per cent, so the inflation outcome endorses the central bank’s highly accommodative, “on hold” stance more than ever before, one market strategist said.

The bank targets annual inflation to be within a 1 to 3 per cent range, with a 2 per cent mid-point, and has maintained a very low 0.25 per cent official cash rate since March last year to try to soften the economic impact of Covid-19.

In its data

release,

Stats NZ

said transport prices rose 3.9 per cent, the biggest quarterly rise in more than a decade. Petrol prices rose 7.2 per cent, the biggest quarterly rise since June 2015. Despite this, petrol prices are 3.8 per cent lower than they were a year ago, the department said.

Rent prices rose 1.0 per cent, the biggest quarterly increase in a year.

Capital Economics Ben Udy said “looking through the noise” of the data, inflation appeared subdued.

“Looking ahead, headline inflation will surge in Q2 as the weakness in prices last year becomes the base for the annual comparison.

“But we expect underlying inflation to remain close to the mid-point of the Reserve Bank’s 1-3 per cent target for the foreseeable future,” he said. “That’s why we think the RBNZ will hike rates next year.”

ANZ said inflation is currently being supported by a number of factors likely to prove temporary.

Higher oil prices and supply-chain disruptions have pushed up goods import prices and shipping costs, while the lack of migrant workers has led to higher-than-otherwise labour costs in some areas, the bank said.

“This is likely to see inflation break above 2 per cent over mid-2021, but we expect inflation pressures to ease once these drivers fade.”

This release was unlikely to challenge the central bank’s view that ongoing stimulatory monetary policy settings will be needed for a sustained return to 2 per cent CPI inflation, it said.