Today's inflation figures were slightly above market forecasts, but were seen as not enough to stop the Reserve Bank from cutting the Official Cash Rate again in just over a fortnight's time.
However, the continued strength in construction cost inflation and a few pockets of price pressures have revived the debate about whether another cut to 1.50% (it is 2.0% now) is justifiable early next year, given many think the September quarter appears to have been the trough for annual inflation at 0.2% and the rate is set to get back into the bank's target band from December.
Statistics New Zealand reported the Consumer Price Index rose 0.2% in the September quarter from the June quarter, which was slower than the 0.4% seen in the previous quarter, but the result was slightly stronger than economists' expectations (consensus was 0.0%) as new housing costs (excluding land) rose 2.0% for the quarter and 6.3% from a year ago.
This housing construction cost inflation more than overwhelmed a 6.7% fall in transport costs over the year, which was due largely to a fall in ACC levies and an 11% fall in petrol prices. New house building cost inflation of 7.9% for the year in Auckland was the highest in a year, although down from 8.5% in September 2015.
Annual CPI inflation was also 0.2% in the quarter and also down from an annual rate of 0.4% in the June quarter. This was the 8th consecutive quarter below the 1-3% target band, but was in line with the Reserve Bank's August 11 MPS forecast and slightly above the market consensus for 0.1% annual inflation. Prices actually fell 0.1% in seasonally adjusted terms in the September quarter.
The New Zealand dollar rose around half a cent to 71.8 USc after the release of the data as financial markets reduced their expectations slightly for another cut in early 2017.
The Reserve Bank's John McDermott said in a speech last week the bank expected annual inflation to return to the bottom end of its 1-3% target range in the December quarter as the effects of previous petrol price deflation fell out of the figures and housing cost inflation continued to rise. He also said in that speech that further policy easing would be required to "ensure that future inflation settles near the middle of the target range."
Housing cost pressures in Auckland
New housing costs rose 2.2% in Auckland and 0.8% in Canterbury in the quarter. Other housing related costs also rose, with local authority rates rising 3.0% for the quarter -- albeit down from 5.7% a year ago to a 14-year low for a September quarter (which is when rates increases are typically done).
Rents for housing rose 0.4% nationwide in the quarter and 2.1% for the year, while rents in Auckland rose 0.7% for the quarter and 3.4% for the year. Canterbury rents fell 0.3% for the quarter. The nationwide rent increase in the quarter was down from the previous six quarters' growth of between 0.6% to 0.8%, but the proportion of rent increases was the highest in more than eight years.
International air travel costs fell 5.9% for the quarter, which followed a 2.9% rise the previous quarter and was a result of discounting as more airlines flew to New Zealand on more routes.
Tradable prices, which are those exposed to international competition, did not change in the September quarter, while non-tradables prices rose 0.3% for the quarter. Tradable deflation for the year was 2.1%, while non-tradables price inflation was 2.1% for the year.
The impact of housing and household utilities inflation was evident in the measure of CPI excluding housing and household utilities, which fell 0.7% in the year to September. The non-tradables index excluding Government fees and charges rose 2.3% for the year.
Still on for a November 10 cut
ASB's Nick Tuffley said cost increases in construction and household contents would give the Reserve Bank some reassurance that pockets of inflation pressure exist, as would measures of core inflation showing it was steady around 0.8% for the quarter and 1.7% for the year.
"We continue to expect the RBNZ to cut the OCR in November. There remains the risk of a further cut in 2017, but this CPI outcome does not add to the case for such a move," Tuffley said.
Tuffley said he was surprised by a 2.3% rise in household contents costs for the quarter, especially given the recent strength in the currency. He pointed to a 2.9% rise in furniture and furnishing prices over the quarter and a 4.4% rise in household appliance prices. Glassware, tableware and household utensils costs jumped 5.6% for the quarter.
"The underlying picture suggests that the economy is beginning to generate a little more inflation. Construction costs look set to remain a key driver of domestic inflation. However, if the NZD remains elevated, this will continue to pose downside risks to the inflation outlook," he said.
"On balance, while inflation remains weak, the RBNZ is likely to be content with this result."
Westpac's Michael Gordon said much of the surprise relative to market expectations was caused by tradables prices and fuel costs, which would be viewed as transitory.
"Today's result is consistent with our expectation for a 25 basis point reduction in the OCR in November," Gordon said.
ANZ Philip Borkin said domestic price pressures were lifting gradually as capacity strains emerged, "but at this stage decent price increases are largely confined to housing."
"Today’s result was not far from the RBNZ’s expectation, and will not stand in the way of it cutting the OCR again next month," Borkin said.
"The more interesting question is whether we see additional easing beyond that, particularly in the context of the strong domestic economy and rising capacity strains," he said.
"The case is building that absent global-centric events, the OCR should not fall further, though this will clearly frustrate, with the NZD to settle higher and the game of chicken between the OCR, inflation profile and NZD to continue."
That's it for now. We'll have more reaction and detail in tomorrow morning's email.