Finally, after just over two years and 175 basis points of Official Cash Rate cuts, annual inflation is back into the Reserve Bank's 1-3% target band.
Statistics New Zealand reported yesterday that the Consumer Price Index rose 0.4% in the December quarter from the September quarter and was up 1.3% from the same quarter a year ago. Annual inflation has been below 1% since the September quarter of 2014 and below the 2% mid-point of the Reserve Bank's target band since the September quarter of 2011.
The open question now is whether inflation is about to rebound and force the Reserve Bank to start hiking again. Most economists think the OCR is on hold for the rest of 2017 at least, with any increases starting only in 2018 and then likely to be slow. The Reserve Bank will be wary of hiking too early or too quickly, given it has had to reverse its two previous attempts (2010 and 2014) at hiking rates back to what it now sees as a neutral rate of around 4% (although that has been drifting ever lower since 2008). The bank itself forecast in November that the OCR would be on hold at 1.75% until the end of 2019.
Yesterday's figures did little to change that outlook. The 0.4% increase was above the consensus of economists' forecasts of around 0.3% and above the Reserve Bank's own forecast in November of 0.2%, but the surprises were mostly in the tradeable portions of inflation that the Reserve Bank can do little to influence. There is also a strong headwind blowing down on inflation from the high currency, which stood at over 79.2 on a Trade Weighted Index basis today -- 3.7% above the Reserve Bank's forecast for the TWI in the March quarter.
Tradable inflation in the quarter was 0.3%, up from 0.0% in the September quarter and dragging annual tradable deflation down to 0.1% from 2.1% -- largely due to higher fuel prices over the year. The biggest surprise was for airfares, which rose 11% internationally and 9.7% domestically during the quarter. The other area where inflation was strongest was in the cost of new houses (excluding land), where prices rose 6.5% from a year ago -- the fastest inflation rate in 11 years.
Core inflation remains subdued. The Reserve Bank's sectoral factor model of annual inflation, which is one of several measures the bank uses to assess core inflation, was flat at 1.5% in the December quarter, while the factor model rose to 1.5% from 1.2%.
Economists agreed inflation appeared to have troughed, but was not rising fast enough or broadly enough for the Reserve Bank to move to action stations just yet.
"While today’s result was stronger than expected, we do not think this signals a stronger than assumed impulse for inflation going forward," Westpac's Michael Gordon said. "With imported inflation remaining modest, headline inflation is still expected to linger in the lower part of the target band for some time," he said.
The New Zealand dollar initially edged up over 73 USc, but drifted lower through the day. Two year wholesale interest rates rose a basis point or two.
In other economic and financial news...
In another sign the economy is pumping extra taxes into the Government's coffers and boosting the budget surplus outlook, Treasury reported a deficit of NZ$768 million for the five months to November 30, which was NZ$936 million better than expected because of strong GST and corporate tax receipts.
Tweets of the day:
Jen Kirkman after Donald Trump announced plans to impose a 20% tariff on imports from Mexico to pay for his border wall.
And you thought a female would be too emotional to be president......
So Mexico will "pay for the wall" with a tax on American consumers. Makes perfect sense.
Have a great weekend. There's a few longer reads below to keep you busy.