Inflation: Are we winning? Verdict due this week with Consumer Price Index data out

Inflation is finally falling but has it dropped far enough for rate cuts? Photo / 123rf

After the unexpected shift in tone from the Reserve Bank last week, there is a serious risk of optimism breaking out about the inflation fight and the timing of interest rate cuts.

But the real test comes later this week, when we get to see the hard data on what’s happened to prices in the three months to June 30.

In the year to March 31, the annual rate dipped to 4%, a vast improvement on the precarious peak of 7.3% in the year to June 2022.

That remains stuck above the Reserve Bank’s (RBNZ) target range of 1-3%, requiring interest rates to remain elevated.

But for how long?

Economists expect we’ll see another fall in the topline Consumer Price Index (CPI) number. ANZ and ASB are picking a 0.4% quarterly rise, for an annual figure of 3.3%. Kiwibank is picking 3.4%.

Westpac is taking a more cautious line, picking 0.6% and 3.5% for the year. That is closer to the RBNZ’s pick (3.6%) when it delivered its last set of forecasts in its May Monetary Policy Statement.

“We are increasingly comfortable that sub-3% inflation will be achieved in the second half of 2024 and that conditions are in place that will sustain 1-3% inflation,” ASB senior economist Mark Smith said.

“A 25-basis-point OCR [Official Cash Rate] cut in November is our base case scenario, but the softness of the pricing side data heightens the risk of RBNZ cuts coming sooner and larger over 2024 than previously thought.”

Non-tradeable troubles

Regardless of the topline figure, much of the focus on Wednesday’s data will be on progress in bringing down sticky, non-tradeable inflation.

Non-tradeable inflation measures final goods and services that do not face foreign competition and is an indicator of domestic demand and supply conditions.

Tradeable inflation measures final goods and services that are influenced by foreign markets.

We know those goods have already seen their rate of inflation come down a long way. Stats NZ’s monthly Selected Price Index provides good insight into tradeable goods like food, and petrol costs.

Tradeable inflation was just 1.6% in the 12 months to the March 2024 quarter (compared with 3% in the 12 months to the December 2023 quarter).

Non-tradeable inflation was 5.8% in the 12 months to the March 2024 quarter (compared with 5.9% in the 12 months to the December 2023 quarter), driven by rent, construction of new houses, and cigarettes and tobacco.

The non-tradeable component of CPI inflation had surprised the RBNZ to the upside for four consecutive quarters since it went on hold in May 2023, said ANZ economist Henry Russell.

“They expected it to be 4.4% [for the first quarter] and instead it was 5.8%,” he said. “A fall to 5.3% in Q2, as we and the RBNZ are forecasting, would go some way to closing the gap. While we are forecasting the same outcome for non-tradeable inflation as the RBNZ, with balanced risks, it’s worth thinking about what the RBNZ would make of a surprise in either direction.”

A downward surprise would likely be significant for signalling a shift in inflation risks, increasing the chance that the RBNZ’s first OCR cuts come earlier than ANZ’s current forecast for February 2025, Russell said.

“However, that will likely need to be supported by dovish signals in upcoming Q2 labour market and GDP data.”

But an upward surprise would likely have a limited impact on the RBNZ’s view, given the Monetary Policy Review had highlighted growing confidence in the medium-term inflation outlook, he said.

Much of that strength in non-tradeable inflation had been related to items such as insurance and utilities, Westpac senior economist Satish Ranchhod said.

“We’re forecasting continued large increases in those areas in the June quarter, with further strength likely over the year ahead,” Ranchhod said.

“Although those sorts of costs respond only gradually to increases in interest rates, the RBNZ does not look through price rises in these areas, especially as they can influence inflation expectations and feed into businesses’ costs more generally.“

The strength in inflation hadn’t been limited to those areas, Ranchhod said. The past few years had seen large and widespread price increases in a range of discretionary spending areas, including the costs of many domestic services such as cultural and entertainment services.

“Those are areas which tend to be more responsive to changes in interest rates. Their continued strength over the past year, despite the rise in borrowing costs, highlights the strength of the inflation pressures that the RBNZ has been leaning against.”

Liam Dann is business editor-at-large for the New Zealand Herald. He is a senior writer and columnist, and also presents and produces videos and podcasts. He joined the Herald in 2003.