Inflation-watchers waiting for CPI numbers

Photo / NZ Herald

The June quarter consumers price index numbers due on Friday will be closely watched for what they reveal about the underlying momentum of inflation before the impending GST increase and other policy-related price increases kick in.

The average pick among market economists polled by Reuters is for the CPI to rise 0.5 per cent, which would keep the annual inflation rate steady at 2 per cent. That is also the Reserve Bank's forecast.

The quarterly increase would be higher were it not for an expected reversal of the 1 per cent jump in food prices recorded in the March quarter. Food makes up nearly 18 per cent of the CPI.

"The Reserve Bank has some discomfort with the stickiness of inflation," Bank of New Zealand economist Craig Ebert said.

"It would prefer there to be much clearer evidence of a slack starting point. The deepest recession for many years only saw inflation dip slightly and briefly below the mid-point of the bank's 1 to 3 per cent target band. Half of the recession was to get rid of excess demand and inflation pressure," Ebert said.

Inflation has averaged a whisker under 3 per cent over five years, held up by the non-tradable sectors (where prices are not disciplined by international competition or exchange rate) averaging close to 4 per cent.

The Reserve Bank forecasts annual non-tradables inflation of 2 per cent in the June quarter, but that is as good as it gets.

The bank expects it to be back above 3 per cent in a year.

And that does not include the impact of the GST rise, which will add 2 per cent to the CPI, or the emissions trading scheme, whose impact on fuel and electricity prices is expected to add 0.3 per cent.

"At the moment the Reserve Bank is assuming that these changes will not flow through to price- and wage-setting behaviour," ASB economist Christina Leung said.

"Given medium-term inflation expectations are already close to the top of the bank's inflation target band, we believe there are substantial risks to this assumption."

ASB estimates tradables inflation was very weak in the quarter, reflecting the delayed effects of the Kiwi dollar's rise late last year which made imported goods cheaper.

The main exception is transport fuels. Petrol prices on average rose 2 per cent during the quarter and diesel prices 6 per cent. This was before the ETS-related increases on July 1 (which have been offset by lower prices for imported fuels).

On the non-tradables side, the first of three hefty increases in tobacco excise is forecast to add 0.2 percentage points to the inflation rate.

ASB also expects to see a modest rebound in construction costs in Friday's numbers.

The Reserve Bank in its June monetary policy statement said it expected the slack in the economy generated by the recession to be eliminated by early next year and that increased pressure on domestic resources would result in higher non-tradable inflation.

It has revised down to around 2 per cent its estimate of the rate at which those resources now grow - the economy's "speed limit".

"We completely agree," Ebert said.

He pointed to the decline in the net inflow of migrants and the "subdued" level of business investment and to the prospect of a systematically higher cost of capital as the Western world adjusts to much higher debt levels.