Economists disagree on whether the latest Consumers Price Index data is good news or not

Statistics New Zealand’s consumer price index (CPI) release showing the slowest rate of quarterly inflation in two years, was clearly good news for consumers and policymakers alike. 

But exactly how good appears to be up for debate. 

Consumer prices rose 1.2% across the March quarter, compared to 1.4% in December, setting annual inflation at 6.7%, which is down from 7.2%. 

The result was lower than market expectations for 1.5% or more, and lower than the Reserve Bank’s February forecast of a 1.8% rise. 

Slower price increases in March were largely due to lower costs among imported goods and services, which are more volatile and less persistent than domestic inflation. 

Domestic prices, or non-tradable inflation, actually accelerated to be running at an annual rate of 6.8%, up from 6.2% in previous two quarters. 

Still, annual domestic inflation was lower than the 7.1% forecast by the Reserve Bank. 

Miles Workman, an economist at ANZ, said having domestic prices increase at a record rate complicated how the data should be interpreted. 

“Despite the weaker non-tradables starting point and weaker headline, we don’t think the sound of corks popping will be resonating through the RBNZ’s offices tonight.”

The central bank would be heading into the May Monetary Policy Statement with a below-forecast inflation result but it didn’t mean the war had been won. 

“Scratching under the surface of today’s data, the fact that 81% of the CPI basket was running above 2% doesn’t bode well for either the persistence of inflation or inflation expectations.” 

There could also be extra fiscal stimulus to push back against in the Government’s Budget, and more cyclone-related inflation in the next data release. 

Cigarettes & home hardware  

Kiwibank economists, Jarrod Kerr and Mary Jo Vegara have taken the opposing view and have chalked up the CPI data as a win for the central bank.

“We need to take this report for what it is: good news,” they wrote in a note. 

It was psychologically significant to have the annual rate of inflation drop below 7%, as it would help calm inflation expectations among the public. 

The pair have predicted that inflation will continue to fall and ultimately land within the RBNZ’s target range by early 2024.

Kerr and Vegara acknowledged there was “an awkward lift” in non-tradable inflation but were more convinced by easing inflation in various “core measures.”  

CPI data can be noisy. For example, cigarettes and tobacco had the second largest price increase during the quarter because of an annual inflation-indexed tax increase.

That contributed to domestic and headline inflation but didn’t reflect any change in supply or demand. 

Digging into the details of the data, most economists found some reason for optimism. 

The price of approximately 60% of all items in the CPI basket increased during the quarter, down from a high of 72% in the final quarter of 2022. 

Some demand-sensitive sectors even saw prices fall. The cost of clothing was down 0.4%, furniture and furnishings fell 2.9%, and computer equipment declined 4.1%. 

Shamubeel Eaqub, a partner at Sense Partners, said household hardware was often a good indicator of discretionary spending and therefore inflation pressure.

Prices for tools and equipment for the house and garden lifted just 0.5%, the smallest increase in at least the past five quarters. 

Nail in the coffin

Eaqub said inflation pressure was easing overall, but the prices that were increasing the most were the ones that would really hurt households.  

The Reserve Bank had already lifted rates too high and further increases would only compound the cost of living crisis, he said. 

Satish Ranchhod, an economist at Westpac Bank, said the “massive” 3.7% increase in food prices was driven by expensive fresh produce after the storms in January and February.

That lift, combined with the cigarette tax hike, was enough to more than offset the 2.6% fall in petrol prices and keep domestic inflation hot. 

However, it was more a case of prices remaining strong rather than actually accelerating. 

“That stabilisation in underlying inflation pressures and easing in some categories is a key development for the RBNZ,” he said. 

Interest rates have been climbing for over 18 months, but it takes time for those increases to be reflected in household demand. Most borrowers are on fixed-term mortgages and don’t rein in their spending until hit with higher rates. 

Ranchhod said we’re seeing inflation ease in demand-sensitive areas as an increasing number of borrowers have been forced to redirect money toward mortgages repayments. 

This suggests the RBNZ’s policy has already begun to work and will bite down even harder with approximately 50% of all mortgages due to be re-priced in the next 12-months.  

With inflation already falling “well short” of the central bank’s forecasts, the chances of needing to lift the official cash rate over 5.5% have diminished. It's currently at 5.25%.

However, most economists still expect RBNZ to deliver one last rate hike in May and hold the cash at 5.5% well into 2024 — or until the economy can take it no longer.