Progress in reducing NZ underlying inflation stalled in Q1, likely frustrating the RBNZ
NZ inflation showed a continued striking contrast between weak goods prices and persistent services inflation.
Progress in reducing underlying inflation stalled in Q1, reducing the odds that the RBNZ will start cutting interest rates later this year, with the familiar sharp contrast between weak goods prices and persistent services inflation.
Ahead of the release of Australia’s Q1 CPI on 24 April, the NZ CPI rose at a marginally faster rate in Q1, up 0.6% (or 0.7% in seasonally adjusted terms) after a 0.5% increase in Q4, with annual inflation slowing to 4%.
The outcome matched the consensus market forecast, but was a little higher than the RBNZ’s estimate of a 0.4% increase.
The detail of the CPI showed a continued sharp contrast between weak goods prices and persistent services inflation, a common feature of inflation in many advanced economies.
On CCI's seasonal adjustment, goods inflation continued to slow, with annualised inflation easing to about 1½% in Q1, down from a 10% pandemic peak.
In contrast, the volatile measure of services inflation picked up to about 6½%, which compares with the 7½% peak reached at the height of COVID.
In terms of underlying inflation, the quarterly trimmed mean CPI suggests progress in reducing inflation has stalled.
The trimmed mean CPI increased by 0.8% in Q1 after a 0.7% rise in Q4 (or about 3¼% versus 2¾% on an annualised basis), which compares with quarterly increases of between 1.2 and 1.5% earlier in 2023 (or about 5 to 6% annualised).
The RBNZ's preferred sectoral factor model estimates - which are only reported on an annual basis - tell a similar story, with inflation of 4.3% in Q1 still well above the bank's midpoint target of 2%.
The tension between weak goods prices and persistent services inflation is also echoed in the split of the sectoral factor model estimates, with lower core tradable annual inflation of 1.7% contrasting sharply with still-high core non-tradable inflation of 5.2%.
The NZ economy has contracted almost continuously since late 2022 and unemployment is rising, but, unless the sectoral inflation estimates show something materially different, the RBNZ will be disappointed by this outcome, which reduces the probability that NZ will cut rates later this year.
The trimmed mean CPI for NZ has only a loose relationship with its Australian counterpart, where the monthly CPI proxy for the first two months of the quarter point to another 0.8% rise in Q1, in line with the RBA’s implied forecast (note, though, that there is still some room for error in mapping from the monthly series to the quarterly trimmed mean CPI).
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Based in Sydney, Kieran Davies is Chief Macro Strategist at Coolabah Capital Investments, an asset manager with 40 executives and over $8 billion in fixed-income strategies. Kieran is responsible for macroeconomic research and investment strategy, contributing to the investment decisions of the firm. Kieran has long experience as a macroeconomist in both the private and public sectors. He has worked most recently as Chief Markets Economist for National Australia Bank and was previously Chief Economist, Australia and New Zealand, for Barclays Bank and ABN Amro Bank/RBS. Kieran also worked as Principal Adviser on the macroeconomy and budget policy in the Commonwealth Treasury and Director of Forecasting.
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Based in Sydney, Kieran Davies is Chief Macro Strategist at Coolabah Capital Investments, an asset manager with 40 executives and over $8 billion in fixed-income strategies. Kieran is responsible for macroeconomic research and investment strategy,...
Based in Sydney, Kieran Davies is Chief Macro Strategist at Coolabah Capital Investments, an asset manager with 40 executives and over $8 billion in fixed-income strategies. Kieran is responsible for macroeconomic research and investment strategy,...
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