NZ: Consumer Price Index

January 25, 2017 03:45 CST

Consensus Actual Previous
Q/Q percent change 0.3% 0.4% 0.3%
Y/Y percent change 1.2% 1.3% 0.4%

New Zealand consumer price inflation accelerated to 1.3 percent in the three months to December, up strongly from 0.2 percent in the three months to September and also beating the consensus forecast for an increase of 1.2 percent. The consumer price index rose 0.4 percent on the quarter, compared with an increase of 0.2 percent in the three months to September and the consensus forecast of 0.3 percent.

This year-on-year increase in consumer prices in the three months to December is the strongest since mid-2014 and takes inflation back to within the Reserve Bank of New Zealand's target range of 1.0 percent to 3.0 percent after eight consecutive quarters below this range. Although the RBNZ likely remains biased towards further policy easing after it cut its official cash rate to a record low of 1.75 percent at its last meeting in November, this pick-up in inflation likely strengthens the case for policy to be kept on hold at the next meeting scheduled for early February.

The increase in headline inflation last quarter was mainly driven by housing-related prices, with prices for the purchase of new housing (excluding land) up 6.5 percent year-on-year, the sharpest increase since 2005, housing rental costs up 2.0 percent, real estate services up 12.0 percent, and property maintenance services up 3.4 percent. This was partly offset by lower transport prices, including a 5.7 percent year-on-year fall in international air transport prices and a 13.0 percent drop in prices fro other private transport services.

Annual inflation for tradable goods and services (that is, those that are imported or compete with foreign goods and are impacted by foreign price changes and exchange rates) rose from minus 2.1 percent in the three months to September to minus 0.1 percent in the three months to December. Annual inflation for non-tradable goods and services (that is, those not subject to foreign competition, for which prices are primarily determined by domestic demand and supply conditions) rose from 2.1 percent to 2.4 percent.

On a seasonally-adjusted basis, the CPI rose 0.7 percent quarter-on-quarter in the three months to December, the biggest quarterly increase since the three months to September 2013. Although transport costs remained weak on a year-on-year basis, they rose strongly on the quarter, with petrol prices gaining 4.1 percent, international and domestic air fares both up around 10 percent and road passenger transport prices up 11 percent. Tradable prices rose 0.3 percent quarter-on-quarter while non-tradable prices rose 0.6 percent.

With today's report showing headline inflation back in its target range for the first time in two years, the RBNZ may be content to leave policy on hold at its next meeting in early February and wait for further information before making any further move. Nevertheless, stronger price gains in the last quarter were mainly driven by housing and transport costs, with overall price pressures still generally subdued. Persistent currency strength also suggests that tradable inflation will remain weak in coming months. Having cut the cash rate from 3.5 percent to 1.75 percent over the last two years, the RBNZ likely retains a bias in favour of further policy easing to help push inflation back towards the middle of the target range.

The consumer price index (CPI) measures the changing price of a fixed basket of goods and services purchased by New Zealand households. The selection and relative importance of the goods and services in the CPI basket represents the overall expenditure pattern of New Zealand households.

The aim of the CPI is to measure price changes of the same sample of products at each outlet over time. When there is a change in the size or quality of any of the goods or services in the basket, an adjustment is made to ensure that the price change shown in the CPI is not affected by the change in size or quality.

The CPI represents $88.9 billion spent on goods and services by New Zealand households, at June 2011 quarter prices. This is based on information from the 2009/10 Household Economic Survey and other sources. The CPI has an index reference period of the June 2006 quarter equal to 1000.

A price index measures the change in price between time periods for a given set of goods and services. It summarizes a set of prices for a variety of goods and services collected from a number of outlets. The consumer price index is the most widely followed indicator of inflation. An investor who understands how inflation influences the markets will benefit over those investors that do not understand the impact. Inflation is an increase in the overall prices of goods and services. The relationship between inflation and interest rates is the key to understanding how indicators such as the CPI influence the markets- and your investments. Inflation (along with various risks) basically explains how interest rates are set on everything from your mortgage and auto loans to Treasury bills, notes and bonds. As the rate of inflation changes and as expectations on inflation change, the markets adjust interest rates. The effect ripples across stocks, bonds, commodities, and your portfolio, often in a dramatic fashion. By tracking inflation, whether high or low, rising or falling, investors can anticipate how different types of investments will perform. Over the long run, the bond market will rally (fall) when increases in the CPI are small (large). The equity market rallies with the bond market because low inflation promises low interest rates and is good for profits.

The CPI is used to help set monetary policy and for monitoring economic performance. It is used by the government to adjust New Zealand Superannuation and unemployment benefit payments once a year, to help ensure that these payments maintain their purchasing power. Employers and employees use the CPI in wage negotiations.