New Zealand: Core inflation robust and rising – BNZ


Inflation data showed the CPI rose 0.1% during the fourth quarter in New Zealand (1.9% annually). According to the  Research Team at BNZ, inflation data “left the market still pricing a small chance of a rate cut over the near term, and increasing odds of this transpiring as one looks ahead.”

Key Quotes: 

“Imaginings that New Zealand’s inflation was losing its way were put to bed by this morning’s December quarter CPI report. Sure, it registered an increase of just 0.1%. But that was suppressed by seasonality. More instructively, the annual rate of CPI inflation stayed at 1.9% in Q4. And the core measures that Statistics NZ published were running at least as strongly as this.”

“The market was expecting a flat result for the Q4 CPI, for an annual 1.8%, as were we. One of the surprises for us was that petrol prices fell only 0.6% and that there was no discernable dent to outpatient services prices in Q4, with the government’s increased subsidy for GP visits that began 1 December.”

“We continue to highlight the robust trajectory of underlying inflation, which should mean headline inflation is underpinned over a longer sweep.”

“Our outlook for CPI inflation, especially on a core basis, is underpinned by our view that the economy is extremely stretched – for physical capital and labour. While aggregate demand might not be expanding strongly, it’s enough to be putting a lot of pressure on aggregate supply.”

“Market reaction to this morning’s CPI was interesting. Going into the number we detected more edginess from those abroad than those on NZ shores. This was portrayed in the polls, at least, with expectations appearing relatively softer amongst those domiciled overseas than locally. In any event, there was a response to the outcome. And this was no doubt to the core inflation messages in the Q4 CPI, rather than just the fact its headline outcome proved slightly stronger than the market’s median expectation. NZD jumped about 35 pips, to 0.6755, not long afterwards”

“While this might be market positioning around something turning sour internationally, we think it has little justification based on New Zealand’s current economic position and outlook. Barring an international capitulation, there remains a lot about the NZ economy that promises to press inflation higher. And that’s notwithstanding the many headwinds that are blowing in its face, from abroad.”

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