CPI falls 0.3% in Dec quarter vs economist expectations for 0.4% rise; Annual inflation 1.8% vs 2.6% expected

By Alex Tarrant

Lower vegetable and telecommunication prices, as well as Christmas discounting, in the December quarter meant the consumer price index (CPI), a general measure of the prices of goods and services across the economy, fell 0.3% in the quarter from September.

This was against expectations for a rise, with the median expectation of economists surveyed by Reuters for 0.4% quarterly inflation in the December quarter, giving 2.6% annual inflation. The Reserve Bank of New Zealand was also expecting 0.4% and 2.6% for the quarter and year, respectively.

The fall meant annual CPI inflation fell to 1.8%, the lowest level since the September 2010 quarter, and down from 4.6% annual inflation in the September 2011 quarter. December 2011 annual inflation figures were the first to not be affected by the rise in GST from October 1, 2010, which boosted prices by an estimated 2.2%.

The 1.8% annual inflation is well within the Reserve Bank’s medium term 1-3% target band, and will support economist picks that the central bank will be able to leave the Official Cash Rate on hold until at least December this year. The RBNZ’s next OCR review is Thursday next week.

Following the release, economists began to note their expectations for the first hike in the OCR were now skewed to a later start (see their reactions below)

At 11:35am - 50 minutues after the figures were released, the New Zealand dollar had fallen by about half a US cent from 80.70 USc to 80.20 USc.

Vegetables, telecoms, discounting

The main reason for the fall was lower vegetable prices during the three months to December 31, Statistics New Zealand prices manager Chris Pike said.

Vegetable prices fell 25% during the quarter, causing a 2.2% fall in overall food prices.

“The larger-than-usual fall for vegetables reflects a supply shortage in the three months to September,” Pike said.

“Basically, vegetable prices were higher than normal last winter, then fell to normal levels towards the end of the year. If vegetable prices had remained constant in the December 2011 quarter, the CPI would have risen 0.1%,” he said.

Prices were also lower during the December quarter for telecommunication services, furniture, kitchenware, and appliances. These falls were partly countered by rises in international air fares and petrol, Stats NZ said.

“Telecommunication services, the second biggest contributor to the fall in the CPI, was down 3.6%. This reflected higher data caps and lower prices for broadband plans, and lower international calling rates from landline phones,” Pike said.

“The household contents and services group also fell, down 1.5%. This reflected lower prices for furniture, kitchenware, and appliances. There was more discounting in the December 2011 quarter than in the previous three months or in the final quarter of 2010,” Pike said.

The main price rise was for transport, up 1.4% in the December quarter, influenced by international air fares (up 5.8%), petrol (up 0.9%), and second-hand cars (up 1.8%). International air fares generally show seasonal increases in December quarters.

Annually, petrol prices were up 11% in the December quarter from the same quarter in 2010. Also up were cigarettes and tobacco (up 9.4%), housing rentals (up 2.0%), second-hand cars (up 5.1%), and local authority rates (up 4.6%), Stats NZ said.

Housing costs up, veges down

The tradable component of the CPI – goods and services that are imported, or local goods and services in competition with imports – fell 0.9% in the December quarter due to the fall in vegetable prices. This was the largest fall in the tradable component since a 2.1% decrease in the December 2008 quarter when petrol prices fell 22%, Stats NZ said.

Lower prices were also recorded for audio-visual and computing equipment, for furniture and furnishings, and for milk, cheese, and eggs. Prices rose for international air fares, petrol, second-hand cars, and package holidays.

The non-tradables component of the CPI – goods and services that do not face foreign competition such as local authority rates – rose 0.2% during the quarter. That was boosted by actual rents for housing, property maintenance services, and purchase of new housing.

The most significant downward contributor to the non-tradable component came from lower prices for telecommunication services, Stats NZ said.

‘General weakness’

Trimmed mean measures, which exclude extreme price rises and falls, recorded quarterly rises ranging from 0.1% for the lowest trim of five percent, and 0.3% for the highest trim of 30 percent.

These measures reinforced the picture of general weakness in the CPI in the December quarter, Stats NZ said.

Economist reaction

ASB economist Christina Leung:

The 0.3% decline in CPI over Q4 was much weaker than our, RBNZ and market expectations. In particular, the subdued 0.2% increase in non-tradable inflation was much weaker than expected.  While part of this was due to one-off factors such as a decline in telecommunications prices reflecting cheaper calling and internet plans, other downside surprises suggest little sign of inflation pressures in the NZ economy.

In particular, construction costs increased only 0.4% over Q4.  We had expected some pick-up in construction cost inflation in light of emerging signs of capacity pressures in the building sector in Canterbury. However, with post-earthquake rebuilding activity yet to pick up to any meaningful degree, there appears little risk of an acceleration in construction cost inflation in the short term.

As expected, the decline in tradable inflation was driven by a fall in food prices over Q4. Nevertheless, tradable inflation was weaker than expected, reflecting subdued demand in the retail sector. While the high NZ dollar over the second half of 2011 has allowed retailers to discount the price of big-ticket items such as furniture and electronic goods, the extent of price declines in these items over Q4 is greater than what the recent currency movements would suggest. Weaker household demand also meant the prices of package holidays and accommodation, which is typically strong in Q4, remain subdued.

Implications:

The CPI showed broad-based softening in inflation, even putting aside a couple of one-off utility price decreases.  The relatively broad-based nature of muted inflation suggests very little for the RBNZ to start worrying about on the inflation front.  In particular, the weak extent of construction-related inflation in the second half of 2011 highlights that the bow wave of earthquake rebuild inflation has yet to appear.

The mild extent of recent inflation combines with the likelihood that crisis resolution in Europe will take time and that the rebuild ofChristchurch risks being set back by the recent earthquakes.  We still expect the RBNZ will wait until December before gradually lifting the OCR but the risks are skewed to a later start – particularly if reconstruction looks like it will be delayed from our expectations of a mid-year start.

Westpac's Dominick Stephens and Michael Gordon:

Implications

The December quarter CPI painted a very benign picture of inflation pressures at this point in time. The lingering impact of the strong New Zealand dollar and the economy's spare capacity is keeping retail price inflation down, and at this stage there is little evidence of inflation pressures stemming from a tighter housing market. We expect annual inflation to remain in the lower half of the 1-3% target band through most of 2012 – allowing the Reserve Bank to push out its projections for rate hikes to resume in June. 

Details 
Consumer prices fell 0.3% in the December quarter, below our pick for a flat outturn and well below the median market forecast of a 0.4% rise. The main negative contributors were an unusually large seasonal drop in food prices (-2.2%, as already detailed in the monthly food price index) and another sharp drop in telecommunication prices beyond what we had estimated. 

Relative to our forecasts, the downside surprises were modest but widespread, with two noticeable themes. The first was generally weak inflation in some of the more import-heavy retail categories, reflecting the legacy of the strong NZ dollar and weak pricing power among retailers - tradables prices were down 0.9% for the quarter and up just 1.1% on a year ago. Apparel prices fell 0.3%, household contents and services fell 1.5%, and recreational and cultural equipment rose just 0.1%. Stats NZ noted a higher degree of discounting in these groups compared to a year ago. 

The second theme was a distinct lack of inflation pressures emanating from the housing market at the moment. This is not entirely surprising - we would expect the inflationary effects of the reconstruction of Christchurch to be drawn out over several years, not months - though there were was some upward pressure on prices in the first half of last year, which seems to have dissipated since. Rents were up 0.4%, new house prices rose 0.4%, and property maintenance materials were flat. 

Market reaction 
The NZD fell 40pts and the two-year swap rate fell 8 basis points. The RBNZ will take comfort from another low inflation outturn, though the surprise for them was entirely on the tradables side rather than the stickier non-tradables components. The December MPS projected rate hikes from around June this year; our current pick is for a September start, and today's result increases the chance that we push this timing out further.

(Updates with NZ$ fall, ASB, Westpac reaction)