Prices rose at their fastest rate in five years during the last 12 months as housing-related costs such as new builds and rentals, transport costs and a cigarette tax hike helped push up the cost of living.
Consumers Price Index (CPI) figures released by Statistics NZ showed an annual increase of 2.2% in the year to March 2017. This was above market expectations of a 2.0% rise. CPI inflation in the March quarter was a whopping 1.0%, adjusted for seasonal effects.
The New Zealand dollar rose 0.4 of a cent against the greenback to US70.4 cents on the news. Read economist reactions below. Capital Economics said the data might spur the Reserve Bank to bring forward its own 2019 Official Cash Rate (OCR) hike track, while Westpac noted upside to their own late-2018 view. Infometrics said they are now expecting a May 2018 hike. Others were more wary on bringing forward exepectations from late-2018.
In its February Monetary Policy Statement, the Reserve Bank had indicated it expected annual CPI inflation of 1.5% for the year to March 2017, with a 0.3% quarterly rise. However, Governor Graeme Wheeler has since indicated CPI inflation might be impacted by variable one-off effects such as food and import price movements.
Economists have pointed out in recent days that the Reserve Bank had indicated it would look through what it may deem as any temporary rise in CPI inflation. In February, the RBNZ indicated it expected inflation to fall away again during the year to March 2018, to sit at 1.3% at that time.
Indeed, there was a catch in Thursday’s figures. Excluding the impact of petrol, cigarettes and tobacco, the CPI only rose 1.5% during the year to March 2017.
Tradeable prices (imports and local goods and services in competition with imports) rose 1.6% over the year, its highest since September 2011. Non-tradeable prices (such as newly built houses and other goods and services that do not face foreign competition) rose 2.5%.
And underlying CPI inflation – excluding extreme price rises and falls – showed an annual increase of about 1.0%. The CPI excluding housing and household utilities group increased 1.7%; excluding alcoholic beverages and tobacco it increased 2.0%; and excluding transport it rose 2.0%.
The central bank is mandated to pursue price stability, with a medium-term annual CPI inflation target band of 1-3%, with a 2% midpoint target. To do this, it seeks to manage monetary conditions in the economy with the Official Cash Rate. The Reserve Bank’s ‘average’ OCR track published in February indicated an expectation of 1.8% through to the September 2019 quarter, when it rises to 1.9% and then 2.0% in March 2020.
But the level of the upside surprise during the March quarter – everyone was already aware of the potential impact from variables such as cigarette and tobacco taxes – will no doubt have economists scrambling as to whether they need to rethink forecasts that the Bank would be able to hold the Official Cash Rate at 1.75% until late 2018.
Housing, transport and cigarette prices
"Rising petrol prices along with the annual rise in cigarette and tobacco tax lifted inflation," Stats NZ prices senior manager Jason Attewell said Thursday. "Petrol prices in New Zealand are closely linked to global oil prices, and cigarettes and tobacco taxes rise in the March quarter each year," he added.
Housing-related prices continued to increase, up 3.3% in the March 2017 year. Prices increased for newly built houses, excluding land (up 6.7%), and for housing rentals (up 2.3%). Newly built houses, excluding land, were up 8.0% in Auckland and 3.6% in Christchurch.
Transport prices rose 3.5%, with petrol (up 12%) partially offset by falls in other private transport services (vehicle relicensing fees), Stats NZ said.
Prices fell for broadband and cellphone plans, as well as handsets. Improvements to speed and data capacity improved the quality of the service, which is reflected as a price fall.
Tradeables vs non-tradeables
A key factor to low CPI inflation in recent years – the Reserve Bank has been heavily criticised for undershooting its 2% target – has been low or negative tradeables inflation. The 1.6% annual increase in March compared to a 0.1% fall in the year to December 2016 and was the highest annual increase for tradeables inflation since the September 2011 quarter (4.6%).
Meanwhile, non-tradeables CPI inflation of 2.5% in the year to March was similar to previous readings over the past five years.
Economist reaction – RBNZ’s own 2019 OCR track could come forward towards economist 2018 picks
The result means the Reserve Bank might not wait until its own 2019 track to lift the Official Cash Rate, Capital Economics’ head of Australia and New Zealand Paul Dales said in a note. “Underlying price pressures appear to be stronger than both we and the RBNZ expected,” he said. Capital Economics had picked a 2.2% overall annual rate. “The RBNZ didn’t expect inflation to be this high until sometime in 2020.”
“It was the strength of underlying inflation that caught our eye. The 0.5% q/q rise in core prices (exc. food and energy) was larger than the 0.3% q/q rise we had expected and left the annual growth rate at a three-year high of 1.6%. That’s a significant turnaround from 1.0% this time last year,” Dales said.
ASB economists said they still expected the next OCR increase to come in late 2018. “We expect the current lift in headline inflation will be temporary, as does the RBNZ, given there were several ‘one-offs’ in Q1,” they said. “Nonetheless, we expect annual inflation to hover around 1.5% and 2% over the next few years. As such, downside risks to inflation, especially those stemming from weaker inflation expectations, have significantly reduced over the past six months.”
They noted that the 2.2% rise in the Stats NZ trimmed mean and weighted median measures indicated CPI inflation was relatively broad-based. “The recent sharp recovery in inflation will come as a significant relief to the RBNZ. The lift has taken inflation expectations back to the middle of the target band with it, removing one of the RBNZ’s key concerns of recent years.”
Westpac economists said the stronger-than-expected result, including signs that tradables inflation may have more momentum than anticipated, “does suggest some upside risk to our view for the Official Cash Rate.”
“The key contributor to the March increase in the CPI was higher food prices. In particular, poor weather saw strong increases in some fresh produce prices. While we’ve seen some continued poor weather in the early part of the June quarter, this still represents only a temporary boost to inflation,” Westpac economists said.
“Of greater note was less-than-expected weakness in the prices of goods such as clothing and electronics. These are items that tend to be imported, and we had expected some softness given the earlier strength in the NZ dollar. However, those firmer prices may suggest that retailers are starting to rebuild margins off the back of solid domestic demand. Notably, business surveys signal that many retailers are looking to increase their prices further over the coming year.”
ANZ economists said the details were far more mixed than the headline figure suggested. “With the economy increasingly butting up against capacity pressures, we do expect domestic inflation pressures to broaden further beyond housing and into the labour market,” they said.
“However, there is still only modest evidence of this occurring at this stage (although the latest equal pay ruling should add some impetus). And with the impact of food and petrol price gains set to be temporary, and plenty of questions surrounding the global inflationary backdrop, it is certainly not guaranteed that headline inflation remains around current levels for a sustained period.
“Today’s data reinforces that the next move in the OCR will be up. While acknowledging the uplift in some core inflation gauges, we doubt there is enough evidence in the breadth of moves to spur the RBNZ into shifting its stance just yet, especially with financial and credit conditions tightening independently of the OCR.”
Kiwibank economists said the data was likely to be heartening for the RBNZ. “At 2.2% yoy March quarter CPI inflation is significantly above the RBNZ's February MPS forecast of 1.5% yoy. However, several of the main price drivers at the start of 2017 are likely to prove relatively temporary,” they said.
“If we exclude the petrol price rise and the cigarette and tobacco excise tax, then the CPI would be at 1.5% yoy - still comfortably within the Bank's target range but not showing any threat of running away. What's important for monetary policy is the medium-term outlook. With the economy growing near trend we don't expect inflation to pick-up significantly further from here given were we are in the current business cycle.”
Meanwhile, Infometrics economists also said the RBNZ was unlikely to stick to it's September 2019 track. "We anticipate an earlier hike, and expect the Bank to begin ratcheting up the OCR from May next year," they said.
The video above was produced by Stats NZ.
104 Comments
You see , here's the kicker , we as a family have not seen any increase in any costs at all in our grocery bill or our power account , or our luxury purchases like flights to QT or dinners . Accomodation has gone up to be fair .
We have got rid of the petrol car and bought a Mercedes diesel which does 1200 kms on a tank , unlike the petrol car which did just 400 or so kms , so our BP fuel card monthly account has halved .
So we are not affected by this ' invisible ' inflation.
Just because you have saved money in some areas doesn't mean inflation isn't happening. It's always true that different areas have different levels of inflation, and so some people experience it more strongly than others depending on where the spend their money. The CPI is intended to be a statistic for the population as whole, not you personally.
I understand this , but I only have ourselves as a source of reference , and we are an ordinary - middle class- baby- boomer -parents -with -three -offspring -family , and we don't see any inflationary pressures .
We have all have jobs ( even the youngest who is still at school has retail job over weekends and 3 afternoons ) , we have surplus income to invest or save , more clothes than we can wear , more food than we can eat , more cars than we can drive and life is pretty good .
How about using the Statistics NZ figures as a source of reference? Their data may not be perfect and there may be valid criticisms, but it's certainly more representative than looking at your own spending. I've been able to reduce my spending over the last couple of years too, so I look at data like this rather than my own budget.
Its not anecdotal , my experience is supported with the actual expenditure which is taken from my ANZ bnak statements and put on an Excel spreadsheet .
While some expenses have gone up marginally , they have subsequently also dropped and some have been once-off increases such as insurance in 2015 , and our power bill has fluctuated and goes up when we order gas , but year on year its been the same
Over over the past 36 months , I have not seen any indication of increases in prices in our expenditure , I have not taken an increase in drawings or salary and still have the same surplus every month .
I am sure those statisticians and actuarial graduates are very smart and very competent and are right .
I am simply making the observation that we , as middle class consumers, dont see inflationary pricing pressures in our cost or standard of living based on our empirical and recorded evidence .
We may be the exception , but we just dont see it .
I also dont forsee an expectation of price increases that are influencing my personal or business buying decisions .
I fact quite the contrary , I want to buy a small office section , but I do expect property prices to decline in the next 60 months as interest rates go up and yield expectations change , so I am not buying yet in anticipation of this .
I may have misread this completely , but thats my view
If you are doing 3x the mileage and diesel is 2/3 the cost of petrol your bill should only be about 20% of what it was.
You don't mention the iniquitous RUCs.
I find that doing 10000 km pa after RUCs I'm only saving $800 , comparing a petrol Mazda 6 with a diesel Mazda 6
The advantage would grow if you are a leadfoot with an SUV
Agreed, It would've been deflationary, could be why inflation has been almost non existent in the past few years. Here's a scaremongering article from 2015 about deflation due to drop in oil price:
http://www.stuff.co.nz/business/industries/64765449/deflation-looms-as-…
According to smokefree.org.nz (http://www.smokefree.org.nz/smoking-its-effects/facts-figures), 605K people smoke in NZ, so increased tobacco taxes / costs would have an impact on CPI inflation
Wow 650, 000 smokers !
I would never have picked that almost 15% of our population smoke .
Most kids dont , and most oldies dont , so it would or could mean that a much higher % of middle-aged do smoke .
And given the price of smokes , I assume very few can afford to be chain-smokers
If you've ever lived in Asia you'd be amazed at the proportion of people who smoke in many countries there. It's usually very cheap to smoke too. Hang around central Auckland a while and you'll see many immigrants from Asia partaking, to the point it's conspicuously noticeable.
japan... they were played by the Americans. You have no choice when foreign troops on your soil. Small island country's destiny is beyond its own control. Just like NZ, without financial sovereignty, we can only drift to whatever big brothers give us. The good thing japan does is to shift more money to technology despite all the factors you mentioned.
Exactly. We can't know what breeze will blow the NZ economy and in which direction, or when. So we can't know that there will be perpetual sustained net migration. Also, voters worldwide are proving increasingly willing to vote against the political hegemony. Even if all the evidence suggest that it could hurt them financially. This is especially true in nations of rapidly increasing financial inequality.
Yes, but not all home owners live in the houses they own and treat them exactly like a stock or other investment in a contracting market because liquidity is highly valuable and mortgage lenders are not always happy to let an investor continue with low DTI.
Not only that but not everyone can wait out a housing crash, people have to sell in many scenarios, so the drop in prices can't be avoided by all.
Gold ? Where do you store it ? At GoldCorp ! Ha ! Remember them ?
Gold only good in tiny value coins & where do you get those ?
So people have silver coins which cost a lot less and can trade easier
Try using your gold bar or coin to buy the groceries
Liquor is another store of wealth to trade and food and fuel
Then once someone knows you have gold you become a target.
Life will be full of challenges should the apocalypse eventuates
Goldcorp the gold bank that sold off all the gold. They were just as good as any other bank.
You can actually get small sheets of ingots that you could trade on the same scale as silver. Depends on how much value you want to store.
If you are worried about being a target then anything useful that can be stolen places you at risk. Food, water, booze or anything else that becomes values when supply lines are cut. In fact gold and silver are of little value in that scenario as you can't eat gold to survive.
Who's surprised?
Essential costs of living have continued to rise.
- Power up year on year
- Insurance goes up double digit percentages most years.
- rates up again
- Groceries (due to weather it has definitely been the most expensive produce in a very long time)
So your tv, phone and brand new car might be cheaper, but the everyday items are what matter.
Our average power bill for the past 12 months is unchanged , our insurance has gone up due to the new formula for earthquakes ( that was in 2015 ) and Auckland rates increases have been subdued for years (ours went down )
I will concede that our fresh food costs have gone up , but we stick to in-season fruit and veg and buy meat on special and freeze it
The insurance increase is not a sustained ongoing increase , it was a once -off event which reflected the changed methodology of insurance valuations and replacement calculations .
That makes insurance more expensive , but once it absorbed its done , its not long -term inflationary .
One the score of fresh food increases , they were small , but can be avoided , but overall our weekly shop has not gone up in 3 years
Here is your issue - you don't understand basic economics and thus cannot relate the concepts with inflation.
It doesn't matter if it is ongoing, or not - an increase in hedonic price from one period to the next represents inflation.
The fact that you substitute goods is of no consequence. Again, the CPI measures hedonically the change in price of goods from one period to the next.
The basket of goods is not being substituted, like you do.
I'll give you a pat on the back for not increasing your costs, but that does not mean that inflation is not present.
This is only in your experience! To address your point about food costs not increasing: when you have to buy meat and freeze it and only have in season produce you are merely substituting goods for ones of a lesser quality. It's exactly the same as buying generic, instead of brand name, 'stuff' when the brand name goes up in price and claiming that the cost of 'stuff' isn't increasing.
Absolutely agree but my point was more about a change in behaviour rather than best buying practices. The 'quality' of the good can be represented by the utility you get from it. So when comparing like for like, sure, in season produce is better. However some people like summer vegetables more than winter so for them in winter for them they are consuming lower 'quality' produce if they restrict themselves to only buying in season. Tomatoes are always a good example. The BL sandwich you now have in winter probably isn't as good as your BLT in summer.
Don't forget frozen veg. Picked fresh and snap frozen to keep all the goodness in. (I think that was an ad somewhere but it's true). And cheap. Don't take those from China though. Pak-n-save for one, are full of frozen vege from China. The colour just doesn't look right to me.
Inflation can be contagious. There is a strong psychological component. Admittedly it has been a long time since we've seen an inflation contagion but if it comes it will be more global than ever before.
Here is some interesting data on the 15 year inflationary cycles since 1914. This was compiled in 2013 with this current cycle seeing an inflationary peak in 2018.
https://inflationdata.com/articles/2013/04/28/inflation-trends-1914-15-…
NZ looks to follow a similar cycle;
http://www.stats.govt.nz/cpichanges/cpipricechanges/images/1914-1933.png
http://www.treasury.govt.nz/publications/research-policy/wp/2013/13-04/…
Very wrong.
Think of it this way - If core inflation is below target, how are you ever going to raise it (given the OCR as the only tool) if, as you say, "the OCR should be set at a rate that compensates savers for inflation PLUS say 1 to 2 % as a sweetener to save".
Okay , thats a good point , however the fact is the mortgage rate goes up or down in tandem with the OCR (MOST TIMES) and back in the day we used the leverage of our home to fund our business , so our cost of business finance was , by default , the mortgage rate .
If , due to a cost of borrowing that was lower than inflation, I could borrow $1,0 million to buy NZX shares that could yield me more than the cost of borrowing it becomes a no brainer .
There are obvious risks in this , but it is viable when we have and OCR feeding into commercial rates which are lower than inflation , to take such risks
No its ex lease (to a Co-op executive who , I assume from the low mileage , drove it from Remuera to the city each morning ) .
The Mercedes agents sold it to us . Its under warranty for a long time to come , and after warranty the first sign of trouble will see it sold.
The depreciation allowances are great BTW , can write off well over ten $thousand per annum
No new boat until I retire .
Thanks for the update Alex ............ now that's what I was expecting , the OCR % should at the very least be higher than the % rate at which the currency's purchasing power is being eroded by inflation .
I am being castigated by nymad for holding the view there is a relationship between official Interest rates and the CPI rate .
Low OCR is to encourage more spending and investment in riskier assets, High OCR is to encourage more saving. The RB don't give a * if you are being well compensated for inflation or not. As the balance currently stands the reserve bank is encouraging people to spend more and save less in order to increase inflation because it has been below target. When the CPI is low they will likely gradually shift rates down until CPI increases, and vice-versa.
Pretty much the hike that's expected with nothing anticipated this year unless some major event happens. Tradable deflation has been diminishing and was always going to make the CPI jump up as it changes back to inflation.
I'm wondering how many of the house investor crew that's been suggesting the interest rates will keep going down are wishing they had fixed for longer than 1 year?
"... failure to account fully for housing in the nation's benchmark for living costs is particularly misleading..research by Commonwealth Bank of Australia, shows that inflation is considerably higher once dwelling prices are included in the basic basket of consumer goods.... CPI "plus housing" index...Once housing is included - even just partially - the CPIH (CPI plus house prices) is around 55 basis points higher than the annual change in CPI..At the moment, house-price-adjusted inflation is probably closer to 2.8 per cent compared to headline inflation of 1.5 per cent, the research suggests."
http://www.afr.com/news/economy/cba-says-house-prices-are-the-massive-f…
Inflation eh. In 1971 the money supply was 43% of the size of the economy (GDP)
In 1980 it was 60%
Ten years ago it was 110%
Now it is 124.5%.
Feel free to double check my data and figures, it could be out.
Where IS that money? If it has found its way into asset prices then which ones are over inflated by a factor of 3x?
Isn't one reason the OCR is so low, because of the GFC, and wanting to decrease the value of the NZD, so NZ makes more money from exports? Also things such as milk prices plunging etc caused them to drop the CR rate. So it is artificially historically low at the moment., which has just fueled borrowing for houses, and pushed up house prices as a result. But milk prices have now gone back up, and the OCR long term has really only one way to go, and that is up. Plus interest on houses is already on the way up, so the trend is upwards.
Facts are, if the RBNZ is still talking of no rate hikes until 2019, inflation is now above the OCR rate, and will remain so even with the expected small retracement in inflation expected in the next couple of quarters. investors/savers such as myself no longer keep the same level of funds with the banks and banks are responding with slowly higher floating and fixed rates to try to attract us back, and worse still, lending caps are being implemented into areas such as housing and property - talking to a property financier the other day who said the politics of housing were a joke, irrespective of what party is in power, and even if NZ could find the tradesmen (Labour will make sure we can't), banks don't have the funding available to fund the required 15,000 home a year into the market.
Rates are going higher and they need to for the good of all, except those that were impatient (and I sympathise with that with FHBs), or who those who were greedy (no sympathy)
"banks don't have the funding available to fund the required 15,000 home a year into the market."
Really?
Funding 15,000 homes per year might cost $10B/yr
Bank lending to housing is currently at a $45B/yr, $14B/yr to investors.
It seems there is ample credit for new homes, but it is being directed to the wrong areas (as a result of the tragically low risk weights applied to existing housing)
Peri - I should have written that as housing units. The only way you're going to get near 15,000 is with a whole lot of apartments in the equation and have you tried to get a bank to fund a commercial property like that lately ? Speaking from some experience here. The banks simply do not have the funding to cover fund all opportunities, and there's very strict lending caps being applied in commercial property at the moment as any property developer will tell. The new Chinese banks and some other third tier providers are trying to fill the hole but hugely short of every doing 15,000 p.a. even if the labour was there.
The CPI figures are nonesense anyway. The problem lies in the "weighting" they give to various items of expenditure. If you go to the website you will discover they apply the same weighting to housing costs as clothing & footewear. I know plenty of people spending $4K or $5k per month on housing but none on new clothes. Such an equal weighting may work for Gore or Oamaru but not AKL. To get the true picture they need to have a CPI for AKL separate to that for the rest of the country. I bet this would show CPI inflation at more like 5 to 10%.
they review the ratings every couple of years, and I agree with you, when taken as a proportion of where people spend there money accommodation is to low a weighting.
there are three main items people spend before anything else and they are
accommodation, rents, mortgage, rates, insurance, maintenance, power
then food
then vehicle, petrol, maintenance , insurance , registration
after that comes all the rest with what is left from the pay, and this part I reckon is given a higher weighting than it deserves
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