CPI rose 0.4% in March quarter; lower than expected (Update 7)

New Zealand's Consumer Price Index rose 0.4% in the March quarter from the December quarter, which took inflation in the quarter from a year ago to 2.0%. This was lower than economists' median forecast for a 0.6% rise for the quarter and 2.3% for the year, but was broadly in line with the Reserve Bank's forecast for a 0.4% rise for the quarter. (Updated with: * government charges rising 4.6% from a year ago, * education costs rising at a 10 year high of 4.8% in the March quarter because of higher tertiary fees, * outlook for the RBNZ's first OCR hike being in 'mid 2010', * ASB economist Christina Leung's comments that July is now more than likely than June for the first OCR hike, * Westpac's economists on why they still sees a June OCR hike * BNZ's economists on why the risks of a July rather than June hike have increased, * ANZ's economists on why a September hike is still most likely) The figures suggest inflation pressures remain under control, perhaps giving the Reserve Bank some flexibility to delay slightly its planned first increase in the Official Cash Rate from its current view of the 'middle of 2010'. Most economists expect the first hike to be June 10 or July 29. The Reserve Bank's next decision is due next Thursday (April 29), with some economists suggesting the Reserve Bank may tweak its 'middle of 2010' view towards 'second half' or 'later in 2010.' The next milestone after that is September 16. If anything, the balance of economist and market opinion has shifted towards a July hike from a June hike after today's data. The New Zealand dollar fell back to 70.9 US cents from 71.4 USc immediately after the release of the figures, although it had zipped up from 70.8 USc earlier in the morning. The strongest inflation came from the government and education sectors. Central and local government charges rose 1% for the quarter and were up 4.6% from the same quarter a year ago. Education costs rose 4.6% in the March quarter alone, which was the biggest quarterly rise in 10 years. "The most significant upward contribution came from higher university fees (up 6.1%), which reflects higher course fees and new compulsory levies introduced by some universities to cover the costs of providing existing services to students," Statistics NZ said. Food prices rose 1% in the quarter, largely due to higher grocery prices, Statistics NZ figures show. Transport prices rose 1.1% in the quarter due to higher petrol prices, while 'recreation and culture' prices fell 1.4%, due in part a 18.6% fall in audio visual equipment prices. Despite the higher government and education charges, non-tradeable inflation was relatively subdued. For the year to the March 2010 quarter, the non-tradable component of inflation increased 2.1%, the lowest since the year to the December 2001 quarter, reflecting relatively low annual increases for electricity, rentals for housing, the purchase of new housing, and property maintenance services. The tradable component rose 2% for the year to the March 2010 quarter. The most significant upward contributions came from petrol (11.9%) and second-hand motor cars (9.9%). ASB economist Christina Leung said that July 29 is now the more likely date than June 10 for the first OCR hike. Here are her comments below.

Q1 CPI came in slightly below our expectations, but was likely in line with the RBNZ's updated forecast given the inrease in petrol prices that occured after the March MPS. Importantly, the slightly softer non-tradable result gives the RBNZ a bit of inflation breathing space in the near-term. The increase in housing costs was more subdued than we were expecting, with the 0.2% increase in construction cost well below what the increase in building pricing intentions in recent business surveys would suggest. Services inflation remains subdued, reflected weak wage pressures in the near term. Turning to tradable inflation, the substantial increase in petrol prices in Q1 of 6.9% drove the increase. This was partly offset by price declines in imported consumer goods - such as furniture and appliances - which were more than what the strong NZ dollar over late 2009 would have suggested. This reflects the weak household demand that we have seen in the recent retail sales data. There was no real smoking gun in the CPI release that would point strongly to a June OCR increase. And, although the headline was roughly in line with RBNZ expectations, non-tradable inflation was on the weak side. Particularly, construction costs show little sign of any pressure yet. This was one area we were anticipating would be picking up by now, yet – along with overall non-tradable inflation – was much softer than we expected. There is now a less compelling case for a June OCR hike when the CPI outcome and uncertainties such as drought and housing are added in. We think the odds are now – just – tilted in favour of a July start rather than June. However, there is not much in it. Particularly, there is a lot of event risk between now and the June MPS, including the Budget and employment data. The biggest event is next week, with the OCR Review. But unless that statement shows heightened concern about inflation or gives some strong signal of a June hike the odds will remain slightly in favour of a July start. The below-expectations CPI headline saw short-term swap rates drop around 5 basis points, reflecting the pared back expectations of a June rate hike from the RBNZ. The 10-year swap had a more modest dip of around 3 basis points from this morning’s level.

This CPI release confirms our view that underlying inflation is very low right now, due to the combined effect of the strong exchange rate and last year's recession. The weakness this quarter relative to our forecasts is partly a timing issue. Much of the exchange-rate impact we had pegged in for next quarter has come through already, and it looks as though rising construction costs is a Q2 phenomenon instead of Q1. Consequently, we will be pushing up our Q2 inflation forecast from 0.3% to 0.5%. Even so, annual inflation is set to fall to 1.6% or so by the third quarter of this year. Markets were primed for a higher quarterly inflation number. Swap rates fell 3 to 4 basis points, and the exchange rate fell 40 pips on the release. Short-term interest rate markets moved from pricing a 50% chance of a June OCR hike to pricing only a 30% chance. We think markets are far too sanguine about the odds of a June hike. In March, the RBNZ's expectation that it would begin hiking "around the middle of 2010" was unconditional, suggesting that by then it was already satisfied that the recovery was panning out in line with their forecasts. There has been nothing since then to change that plan; if anything, developments since the March MPS have been to the upside of expectations. The small upside surprise on inflation came on top of other small upside surprises on NZ and global growth, as well as a large upside surprise on export prices. Yes, the RBNZ will feel some comfort about the current level of inflation. But the RBNZ is a forward-looking central bank, and future inflation pressures are such that an OCR of 2.5% is now manifestly inappropriate. We continue to expect a June OCR hike.

For the near term the CPI picture looks as though it will give the RBNZ continued breathing space, and time to assess more data, and the way ahead. It’s what the data on economic activity have been arguing, also, over the last month or two. It feels as though we should just shift our formal view to July for the first OCR hike. And we would, if it wasn’t for the risk that the balance of risks could yet shift back more to June, and that the RBNZ could just get the process under way regardless, with a view to the future, rather than the present clouds. We suppose what we’re looking for is a better opportunity to jump the fence. It might come with the Bank’s commentary at its OCR review next week. Following that, a less than encouraging labour market report, with the HLFS due 6 May, could do the trick. It should at least be obvious which way we think the sands are shifting.

The CPI data today is historical so we are coy about getting overly excited. The market reaction on the day (currency down 30 points and rates market rallying sharply) tells us that the market was looking for a smoking gun to force a rate hike in June. Today’s figures didn’t deliver it, although the figures are still broadly consistent with the RBNZ’s March projections. But beyond key releases over the coming months including the labour market and Budget, the June decision is increasingly shaping up as one of whether the RBNZ will back its bullish 2010 economic assessment despite generally mixed economic signals so far (i.e. sub-trend growth as opposed to the RBNZ’s above trend view). We concur with the bullishness, but ours refers to 2011, and it’s critically dependent on policy conditions remaining supportive for a wee while yet. We continue to prefer Q3 over June for the start of the tightening cycle.

The consumers price index (CPI) rose 0.4 percent for the March 2010 quarter, Statistics New Zealand said today. Higher prices for food and petrol were partly offset by lower prices for recreation and culture. The CPI measures the rate of price change of goods and services purchased by households. Food prices rose 1.0 percent in the March 2010 quarter, reflecting higher prices for grocery food (up 1.1 percent), in particular milk, cheese, and butter. Prices also rose for fruit and vegetables (up 2.3 percent) and meat, poultry, and fish (up 1.3 percent). The food group recorded its lowest annual price increase since the June 2005 quarter. "Although food prices are 1.2 percent higher than a year ago, they are 10.1 percent higher than two years ago," Statistics New Zealand's prices manager Chris Pike said. The transport group (up 1.1 percent) also made a key contribution in the March 2010 quarter, due to petrol prices rising 6.9 percent. If petrol prices had remained unchanged from the December 2009 quarter, the CPI would have recorded no change. Petrol prices are now at their highest level for 18 months. International airfares fell 8.3 percent; they usually fall in the March quarter, following a seasonal rise in the December quarter. Annually, the transport group recorded an increase of 6.4 percent, with higher prices for petrol (up 11.5 percent) and second-hand cars (up 9.9 percent). The recreation and culture group (down 1.4 percent) made the most significant downward contribution in the March 2010 quarter. This fall was largely the result of lower audio-visual equipment prices (down 7.6 percent), which also fell by a similar amount last quarter. The CPI increased 2.0 percent for the year to the March 2010 quarter. Non-tradable goods and services rose 2.1 percent. "The annual price rise for non-tradable goods and services, which do not face foreign competition, was the lowest for more than eight years," Mr Pike said. Tradables (which are imported or in competition with imported goods) rose 2.0 percent in the year to the March 2010 quarter, reflecting higher prices for petrol and second-hand cars. Statistics NZ visits 3,000 shops around New Zealand to collect prices for the CPI and check product sizes and features.