By Bernard Hickey
Higher construction inflation in Auckland helped push inflation slightly above economists' forecasts in the September quarter, but the surprise was not enough to shift expectations for one more cut in the Official Cash Rate on November 10. It has, however, revived debate about whether the Reserve Bank will have to cut again to 1.5% early in 2017.
New Zealand's Consumer Price Index rose 0.2% in the September quarter from the June quarter, which was slower than the 0.4% seen in the previous quarter, but the result was slightly stronger than economists' expectations as new housing costs (excluding land) rose 2.0% for the quarter and 6.3% from a year ago.
This housing construction cost inflation more than overwhelmed a 6.7% fall in transport costs over the year, due largely to a fall in ACC levies and an 11% fall in petrol prices. New house building cost inflation of 7.9% for the year in Auckland was the highest in a year, although down from 8.5% in September 2015.
Annual CPI inflation was also 0.2% in the quarter and also down from an annual rate of 0.4% in the June quarter, but was in line with the Reserve Bank's forecast and slightly above the market consensus for 0.1% inflation. The consensus for quarterly inflation was around 0.0%. The New Zealand dollar rose around half a cent to 71.8 USc after the release of the data.
The Reserve Bank said in a speech last week it expected annual inflation to return to the bottom end of its 1-3% target range in the December quarter as the effects of previous petrol price deflation fell out of the figures and housing cost inflation continued to rise. The September quarter annual rate of 0.2% was eighth consecutive quarter where headline CPI inflation has been below 1%. Prices actually fell 0.1% in seasonally adjusted terms in the September quarter.
New housing costs rose 2.2% in Auckland and 0.8% in Canterbury in the quarter. Other housing related costs also rose, with local authority rates rising 3.0% for the quarter -- albeit down from 5.7% a year ago to a 14 year low for a September quarter (which is when rates increases are typically done).
Rents for housing rose 0.4% nationwide in the quarter and 2.1% for the year, while rents in Auckland rose 0.7% for the quarter and 3.4% for the year. Canterbury rents fell 0.3% for the quarter.
The nationwide increase in the quarter was down from the previous six quarters' growth of between 0.6% to 0.8%, but the proportion of rent increases was the highest in more than eight years.
International air travel costs fell 5.9% for the quarter, which followed a 2.9% rise the previous quarter and was a result of discounting as more airlines flew to New Zealand on more routes.
Tradable prices, which are those exposed to international competition, did not change in the September quarter, while non-tradables prices rose 0.3% for the quarter. Tradable deflation for the year was 2.1%, while non-tradables price inflation was 2.1% for the year.
The impact of housing and household utilities inflation in evident in the measure of CPI excluding housing and household utilities, which fell 0.7% in the year to September.
The non-tradables index excluding Government fees and charges rose 2.3% for the year.
Economist reaction
ASB Economist Nick Tuffley said cost increases in construction and household contents would give the RBNZ some reassurance that pockets of inflation pressure exist, as would measures of core inflation showing it was steady around 0.8% for the quarter and 1.7% for the year.
"We continue to expect the RBNZ to cut the OCR in November. There remains the risk of a further cut in 2017, but this CPI outcome does not add to the case for such a move," Tuffley said.
Tuffley said he was surprised by a 2.3% rise in household contents costs for the quarter, especially given the recent strength in the currency. He pointed to a 2.9% rise in furniture and furnishing prices over the quarter and a 4.4% rise in household appliances. Glassware, tableware and household utensils costs jumped 5.6% for the quarter.
"The underlying picture suggests that the economy is beginning to generate a little more inflation. Construction costs look set to remain a key driver of domestic inflation. However, if the NZD remains elevated, this will continue to pose downside risks to the inflation outlook," he said.
"On balance, while inflation remains weak, the RBNZ is likely to be content with this result."
Westpac's Michael Gordon said much of the surprise relative to market expectations was caused by tradables prices and fuel costs, which would be viewed as transitory.
"Today's result is consistent with our expectation for a 25 basis point reduction in the OCR in November," Gordon said.
ANZ Economist Philip Borkin said domestic price pressures were lifting gradually as capacity strains emerged, "but at this stage decent price increases are largely confined to housing."
"Today’s result was not far from the RBNZ’s expectation, and will not stand in the way of it cutting the OCR again next month," Borkin said.
"The more interesting question is whether we see additional easing beyond that, particularly in the context of the strong domestic economy and rising capacity strains," he said.
"The case is building that absent global-centric events, the OCR should not fall further, though this will clearly frustrate, with the NZD to settle higher and the game of chicken between the OCR, inflation profile and NZD to continue."
Consumer Price Inflation by Group
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(Updated with more details, reaction)
28 Comments
Yes , do the brains -trust at RBNZ think we are all stupid or what ? They should tell us the truth and get it out there ................ we are staring down a deflationary barrel
This lying and obfuscating nonsense from them damages and potentially destroys all their public credibility
We know exactly what is going on , there is no inflation , and they are lying to the New Zealand public .
They should tell the truth and stop trying to put a spin on the statistics .............. if there was any inflation they would not need a rate cut at all
That's the difference between the tradable sector which is hotly competitive, and the non-tradable sector which includes the types of monopolies you mention.
For the 'tradable sector', read the globalised 'free-trade' sector featuring many, many providers. For the 'non-tradable sector' read the protectionist, unfair-trade sector, featuring monopolies and oligopolies.
Easy to figure out which side of the ledger has the most benefits for most Kiwis.
So just to be clear, there is an 85% chance the RBNZ will lower the OCR in Nov, so it can increase inflation to the required 1-3%? If we remove fuel (which NZ has no control over its pricing and is a major component in our economy) from the CPI - what is our true domestic CPI currently - 2-3%? We are heading for a train wreck.
Annual CPI inflation was also 0.2% in the quarter and also down from an annual rate of 0.4% in the June quarter, but was in line with the Reserve Bank's forecast and slightly above the market consensus for 0.1% inflation.
Could the RBNZ please redefine the term "stimulus"? There is no discernible merit associating it with official OCR cuts, supposedly enacted to trigger a mysteriously missing consumer propensity to collectively pay more for goods purchased over time.
ABSOLUTE RUBBISH inflation is zero (or less) , and we should stop pretending & tell the public the truth.
(See our personal expense situation below if you want evidence )
And , please explain why construction costs are included in CPI , and what weighting they receive , because we need to ask how many New Zealanders are even affected by the costs of building materials or the wage of a 20 something year old Chippy who is earning more than a Doctor of similar age ?
I am an ordinary New Zealander , and in the past year , and this is our reality :-
Our grocery bill is down by $1,000 year on year ( we spend around $300 per week ) evertyhing has gone down except Milk ( funny that while the cost of crude oil have gone down and the price of raw milk has gone down petrol has dropped but or milk is still among the most expensive in the OECD )
Our fuel bill is down from around $400 a month to around $300
Our electricity and gas account is down marginally due to the way we now buy gas
Our Internet , phone Broadband is flat , but we now have unlimited data which we did not have before
Our Municipal rates came down and have stayed down ( about $350 per annum ) we were paying way too much
Our costs of air travel have dropped by about 30% between our 2015 trip and 2016 trip (to the same destination )
My wife and I buy clothes online and the clothes and shoes expense year on year is a down a staggering 80% down , a Van Huesen lounge shirt costing up to $80 in Auckland now costs under US$10 from Alibaba.
Our Mortgage is paid off, so we dont have an interest cost , but if we did the repayments would be way down with fixed mortgage rates of 3,9% available
Our car licences ( 3 cars) are down significantly due to ACC reductions
The things that have gone up or Warrants of fitness on the older car , , a visit to the Doctor , the cost of a haircut, and bus fare for our child at Uni
We now have a surplus of income over expenses which we never had before .
SO PLEASE EXPLAIN ...... WHERE IS THE INFLATION ?
If anyone ever wants a 101 on how to misinterpret consumption indexes, this is an excellent starting point.
I could be wrong, but I'm pretty sure a couple of months or so ago you were on the bandwagon complaining that the CPI was understated because it didn't factor in land values..
As you requested the info, I'll provide you the link so as you can do some much needed research.
http://www.stats.govt.nz/cpi
I've been searching for explanations to explain the likes of him and Roger.
I settled on the fact that there is a level of self interest to do with wanting lower interest rates. Perhaps in Boatman's case he doesn't want to be so nakedly transparent, so he hides his desire for a lower dollar behind a "worry" about deflation . This is also known as "concern trolling".
Also i think there is a feeling that talking about BIG BAD DEFLATION, blindly quoting examples of the 1930's etc, makes you sound smart and contrarian. Do some reading on Balance Sheet Recession Theory and then you'll understand the difference between debt bubble induced deflation, and the benign technology/competitiveness-induced deflation that we are currently enjoying.
Anyway, you'll all get your inflation soon enough. And the same people complaining now will be the first ones screeching that the RBNZ is behind the curve in controlling it.
Was I ?
My stance has been that inflation has been either falling or benign for a few years now , and even got into an argument with David Chaston about inflation .
Furthermore , land prices in Provincial New Zealand seem to have been either static or falling for the most part
While land prices have gone up in Auckland ( due to supply constraints and administered costs (like a water meter connection now costing $14,000 ) the costs of servicing debt on the land have gone down form around 11% in 2007 to 4% today
I apologise. So many people arguing nonsense over the CPI - it's easy to confuse you all.
My jibe was more at the fact that land values/capital financing costs should not be included, either.
Judging by your understanding of inflation, you would probably be best to avoid arguing with David Chaston over the subject.
It might be mistaken for a bit of Dunning-Kruger.
My thoughts, anyway.
Inflation is 0.2% Housing inflation is 11%. Why does nothing twig?
I still maintain CPI targeting is broken.
Second hand housing is not included, and new build housing has had a falling weighting on CPI.
CPI weighting for new builds was 9.87% in 1999 and 4.20% in 2014 despite the tripling/quadrupling in price.
This is despite mortgages on residential property being the majority source of money creation.
Through housing policy failure by this government and the last the money earned by working people is losing its value at a high rate. The true inflation rate for working people is much higher than CPI.
Central bankers have collectively lost the plot. They must raise interest rates or face their doom.
http://www.telegraph.co.uk/news/2016/10/17/central-bankers-have-collect…
According to one of my Bwankers, liquidity is now the Big, Big... problem.
According to him, they need more funds in reserve to cover their problem, they fear they have hit the limit. at any percentage, going forwards and cannot reverse.
According to him, real estate borrowings have hit the wall, hit the deck, hit the car, put on the house, even hit the ceiling.
According to me Government is the problem, bigger than ever before, in my entire lifetime.
According to me the Reserve Bank is the problem, loose policies, lose money.
According to me, Interest Rates are the the issue, cannot keep issuing new debt, as never before, ad-infinitum.
According to me, money is not worth having, but it sure helps.
According to them houses are the only safe bet in Awkland.
According to them, apartments are falling and failing.
According to Government, we cannot afford to NOT, build more prisons, to hold the delinquents, they have created, as they have no home of their own and Mummy and Daddy are crack and P addicts, don't live together anymore, so need more social housing, thus, imported from overseas, by overseas and onshore interests, aided and abetted by Government.
According to me studies have education of stupid Government and Bwanking Officials to blame.
According to them, we need more students, plus overseas interests to compound and to pay for their own stupidity.
According to me foresight would not have let this happen.
According to the weather forecast it is all Fine and Dandy.
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