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)
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