NZ CPI Preview: Low headline but firming domestic pressures - ANZ

Philip Borkin, Senior Economist at ANZ, notes that the NZ Q2 CPI figures are released next Monday (18 July) and they expect a 0.5% q/q headline CPI increase, which is a touch below the RBNZ’s pick.

Key Quotes

“Annual inflation is expected to lift to 0.5%, which would be the highest in 18 months, although still the seventh consecutive quarter below 1%.

Headline inflation is clearly low, and looks set to remain below the RBNZ’s target mid-point for some time yet given the dampening influence of the NZD. However, we suspect the Q2 CPI figures will show mounting evidence that domestic inflation pressures are lifting off lows, which would be consistent with the economy’s solid underlying performance and ongoing absorption of spare capacity. Where capacity pressures are most intense (construction), price tension will be clear.

In short, we expect a low headline, but solid non-tradable print. Non-tradable prices are estimated to have lifted 0.6% q/q (2.1% y/y), which is in line with the signal from our Monthly Inflation Gauge. Tradable prices are estimated to have risen 0.5% q/q (-1.6% y/y).

We expect the figures to cloud the upcoming August decision. The RBNZ acknowledges that price and wage setting behavior is more backward-looking than previously thought, therefore a low “actual” CPI outturn matters, and the NZD will push out prospects for any immediate rise in headline inflation. At the same time, the RBNZ more directly controls non-tradable inflation. And if we are correct with our 0.6% q/q expectation, then Q2 will be the third consecutive quarter it has come in above the RBNZ’s expectations.”