By Bernard Hickey
Inflation was softer than expected in the March quarter as the strong New Zealand dollar helped lower car and clothing prices, helping to offset a rise in housing cost inflation, a hike in tobacco taxes and higher council rates.
International airfares and package holiday costs took a seasonal dive in the March quarter, as did vegetable prices.
However, economists said the Reserve Bank was still very likely to hike the Official Cash Rate by a further 0.25% next Thursday and again on June 12 to contain inflationary pressures building later this year and into next year. Some did however caution that the inflation surprise made a fourth rate hike in succession on July 24 less likely.
Statistics New Zealand reported the Consumer Price Index (CPI) rose 0.3% in the March quarter from the December quarter as lower prices for international airfares, vegetables and package holidays dampened the effects of higher tobacco excise and housing costs.
The rise was above the 0.1% seen in the December quarter, but down from 0.9% in the September quarter and was below the median economist forecast for quarterly inflation of 0.5%.
Inflation in the year to March quarter was 1.5%, which was down from 1.6% in the December quarter and marginally above the 1.4% seen in the September quarter. It was also below the median forecast for 1.7% annual inflation.
Cigarette and tobacco prices rose 10.2% in the quarter after an 11.3% rise in excise duties in January, which meant the CPI without cigarettes and tobacco showed no change in the March quarter, Statistics NZ's prices manager Chris Pike said.
Prices for housing and household utilities rose 0.7% in the quarter, reflecting a 1.2% rise in prices for buying newly built houses, rents rising 0.6% and property maintenance rising 1.2%.
International air fares fell 10% in the March quarter after a 12% rise in the December quarter, while vegetable prices fell 5.8% and package holidays fell 5.9%.
Statistics NZ said about half of the 1.5% annual increase in the CPI came from housing and household utility costs, which rose 3.3% for the year.
"The price of buying a newly built house without land increased 5.1%. In Auckland the increase was 5.9% and in Canterbury it was 7.6%," Pike said.
Rents rose 2% for the year, property maintenance rose 4.5%, council rates and related services rose 4.2% and household energy costs rose 2.7%. Insurance costs rose 5.9% for the year.
"The main downward contribution for the year came from cheaper audio-visual and computing equipment (down 10%). There were also lower prices for vehicles (down 3.1%)," Pike said.
"The strong New Zealand dollar has had a downward influence on the retail prices of internationally traded goods, including cars and appliances," he said.
The New Zealand dollar initially dropped 40 basis points to 86.05 USc, but rebounded within half an hour to be down just 10 basis points.
Economist reaction
ASB Chief Economist Nick Tuffley said most of the surprisingly weaker than expected inflation was from tradeable prices, although non-tradeable inflation was also fractionally weaker than expected.
"Key drivers of the weak tradable inflation were imported goods prices (such as clothing, household contents, cars), which suggest that retailers are still facing margin pressure (on top of the NZD impact)," Tuffley said.
"The main inference from the CPI is that tradable inflation is still surprisingly contained. Despite rising spending and consumer confidence, retailers are struggling to pass on price increases as yet," he said.
"An April OCR increase remains a done deal and is fully priced. We expect the RBNZ will hike in April, and then wait until July before following up," he said.
Wholesale interest rates for two to four year terms fell around 4 basis points.
Westpac Chief Economist Dominick Stephens said the surprise was entirely from the tradeable sector.
"Lower-than expected inflation will obviously reduce the urgency for the Reserve Bank to hike the OCR. But most of the surprise was on transitory factors. Domestically generated inflation is continuing to gradually rise, and that is the bit that can become persistent if the RBNZ doesn't act," Stephens said.
"So we don't believe that this low inflation print will kibosh the hikes that we had pencilled in for April and June of this year. However, low inflation plus the high exchange rate and falling dairy prices, taken together, have placed a cloud over our forecast for a July OCR hike," he said.
'Where's the rental inflation?'
Stephens also pointed to the fall in rental inflation to 2% for the year.
"The fact that rents are rising so slowly puts paid to the idea that the cause of rising house prices is a shortage of physical supply - if that were really the case, rents ought to be rising too," he said.
ANZ Chief Economist Cameron Bagrie pointed to annual non-tradeable inflation rising to a two and a half year high of 3%, while tradeable prices fell 0.7% for the quarter and 0.6% for the year.
"While annual core and headline inflation is still below the midpoint of the inflation target, the growth and inflation outlook warrants the continued removal of interest rate stimulus. We expect a further two OCR hikes in succession before a pause," Bagrie said.
"Outside of housing and administered price increases, the overall inflation backdrop remains contained," he said.
"Despite the lack of a smoking gun on the immediate inflation front, the strengthening demand backdrop looks set to push annual inflation to around 2% by the end of the year. Despite the stratospheric NZD, we expect the RBNZ to raise the OCR in April and June, with prompt RBNZ action to contribute to a moderate OCR endpoint."
(Updated with more details, reaction)
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29 Comments
"Stephens also pointed to the fall in rental inflation to 2% for the year.
"The fact that rents are rising so slowly puts paid to the idea that the cause of rising house prices is a shortage of physical supply - if that were really the case, rents ought to be rising too," he said."
Someone needs to have a chat to this guy, he's clueless, doesn't he know rents are going up at $80/week because the evil commie urban planners in our local councils are insisting people have access to outdoor space and ceilings high enough that they don't hurt themselves bumping into light fittings. Bill English said so.
The reason for low inflation in rents is that so many people have wisely invested in property
so there is a modest over supply which keeps downward pressure through competition.
This is fast coming to an end as higher interest rates, insurance, distorting LVR rules and higher house prices push people back into the rental market.
With 200 rentals I can see the queues getting longer and longer and yet more desperate.
Suits me fine.
That is an assumption and not a fact.
Lets look at that. I you assume most ppl are in a home right now so stay renting while tehy look about. If they cannot buy then they continue to rent, it doesnt push them back they simply never stop renting.
An equally interesting alternative is ppl cannot afford to pay more, hence this is why most rents are flat.
I seem to recall that you and/or oily were claiming that rents would shoot up, doubling, nope no sign of it in what 2 years?
So about the standard of your usual opinions...or I should say prayer.
regards
But rents are not going up Big Olly? (My rent has been stable for last 2 years with no sign of increase). Also can some of you Landlords please spend some money on your "Investments"? The 50"s and 60"s decor is long past its use by date, some of the rental crap I have viewed recently is like visiting Motat.
My rent has gone up $10 per week in 4 years. Fantastic landlord, gets stuff done ASAP whenever I tell him to - provides great value and excellent service.
Given the glut of rental properties on the market, if he tries to put the rent up too much I'll give him notice and he can enjoy a couple of months void or back down.
Good time to be renting and building up a tidy deposit.
So we have 1.4%, then 1.6% then 1.5% and that 1.5% is due to a fixed cost rise in tobaco, ergo that 1.5% should be more like 1.4%
And we just have to have OCR rises...have to I tell you...
If inflation is persistantly flat as it is right now then there is no justification to rise the OCR...or certainly not with any urgency.
regards
I have some property, but I have to face reality of these figures. 2 % is what it is. Don't have to like it, but thats the numbers.
When I see other property owners trying to talk up rental figures, despite the evidence, then I worry that they are already in trouble.
This comments stream is notable for the tenants who are moaning about their landlords.
Which surprises me as they should realise almost all landlords are good people who provide tenants with much-needed housing at very affordable cost.
Tenants should celebrate their landlord... publically praise them. Landlords do a great job in New Zealand.
I wonder at the long term prospects of the many rental finacials i see. Mostly they are making ends meet re outgoings verse rent, but with absolutely no provison for an capital improvements, bare maintenance only. So FFWd 5 or 10 years and i can only imagine what physical state they will be in (let alone the type of tenant). Maybe the land value alone will be reward enough, but i many of the buildings will be worth zilch.
As someone looking for a house to rent, I have been following prices in my area very closely. Our current rental we negotiated down from $700 to $650/week 3 years ago and the price has stayed at that level even as we negotiated a heatpump and new bathroom.
All the rentals in my area between Takapuna and Devonport are reducing prices to rent. One dropped from $1250 to $995/week, Another $960 to $800. Most adverts come on trademe and there is no movement then the prices drop $30/week and still nothing. Then they drop $50/week and sometimes they go. Mostly they hang around for ages. Can't remember the last time I had so much choice.
It isn't something I'm following closely, but the owners of the house next door have been trying to find a tenant for it since November. Nothing wrong with it, really good location, just stupidly overpriced for what it is. We were expecting that by now they'd have got a clue and dropped $50 off the rent, but instead they've sunk a few more thousand into superficial renovations.
Deflation rules, ok?
Except for monopoly price setting monopolies/fewopolies who can charge what they like without any buyer power, like council rates, insurers, power cos, oil cos, supermarkets, banks, etc .... oh thats most things.
So the solution to stop price setting monopolies is ......... increased interest rates!
But never fear, the Govt promises wage hikes to compensate.
One wonders where this extra money for wages is coming from.
In terms of monopolies, well there is an option, ie at some point buyers simply stop buying. Oil got to $148 and the world's economy collapsed. Now oil doesnt seem to make it much past $110 and as a result oil companies are canceling work, that bodes very bad. I'd suggest that looks like the maximum that can be extracted from punters. Rent etc see's the same thing.
Supply side V demand side economics and one has clearly won that bun fight and the economists are on the losing side IMHO.
regards
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