Saturday, July 17, 2010

Inflation now 1.8pc - lower food prices offset tobacco hike

The consumers price index (CPI) rose 0.3 per cent for the June 2010 quarter, Statistics New Zealand said today, which means annual inflation is now running at 1.8 per cent.

This morning's inflation numbers are slightly lower than what many expected, with economists and the Reserve Bank picking 0.5 per cent for the quarter - a 2 per cent annual inflation rate.

This follow a 0.4 per cent rise in the March quarter, when the CPI annual rate rose 2 per cent.

Higher tobacco, transport, and housing prices were partly offset by lower food prices prices in the latest figures.

Statistics NZ manager Chris Pike said cigarette and tobacco prices rose 8.7 per cent, reflecting excise duty increases.

Food prices fell 0.9 per cent, reflecting lower prices for meat, poultry, and fish (down 3.3 per cent) and fruit and vegetables (down 2.6 per cent).

The transport group rose 0.9 per cent in the June 2010 quarter, reflecting higher prices for petrol (up 1.4 per cent) and second-hand cars (up 2.4 per cent).

The housing and household utilities group rose 0.5 per cent, with higher prices for rentals for housing (up 0.5 per cent) and electricity (up 1 per cent).

The average pick among market economists polled by Reuters was for the CPI to rise 0.5 per cent, which would keep the annual inflation rate steady at 2 per cent. That was also the Reserve Bank's forecast.

Goldman Sachs JBWere economist Philip Borkin said the "downside
surprise" for the Reserve bank was a pleasant one, ahead of what is arguably going to be a challenging period for policymakers.

"At a time when the domestic economic recovery is lacklustre (with data and various industry anecdotes nothing but mixed) and risks remaining around the pace of global recovery, in our eyes the Reserve Bank is going to have to contend with inflation likely rising over 5 per cent year on year on the back of government charges and a hike in GST - a somewhat uncomfortable scenario."

The Reserve Bank, said Borkin, was assuming that "the coming temporary increase in inflation is assumed to have an only limited impact on medium-term inflation expectations".

"We do not feel today's data has any major implications for monetary policy. We see the Reserve Bank is rightly more concerned about medium-term inflation and there are still a number of question marks on this front; in particular, whether inflation expectations remain anchored."

Borkin said he thought the Reserve Bank would pause in its move towards raising the Official Cash Rate before the end of this year, though he did still expect a 25 basis point hike at the end of this month.

"But as the recent domestic data attests to (and the soft CPI today supports at the margin), we believe there is a risk that this pause comes earlier than our current forecasts."

ANZ Bank senior economist Khoon Goh described today's CPI numbers as "soft across the board - especially when you consider that most of the increase in the headline number was due to a large increase in tobacco excise taxes."

If the tobacco tax increase was excluded, underlying CPI was up just 0.1 per cent in the quarter.

This morning's subdued CPI would be " the last for a while", said Goh, " as various government related policy changes is set to lead to large increases in the CPI over the coming quarters."

Nonetheless, the starting point was better than what the Reserve Bank was expecting. Goh said he expected to see another increase in the Official Cash Rate - 25 basis points (0.25 per cent) later this month.

Today's figures, along with other recent data, suggested " some waning in growth momentum", said Goh.

CTU Economist and Policy Director Bill Rosenberg said the Reserve Bank should be holding interest rates down in light of the lower than expected inflation rate announced today.

"The Reserve Bank overestimated inflationary pressure and underestimated the grounds for concern at the state of the economy," he said.

"The main concern now is about the impact of GST on inflation heading into 2011 and the pressure this puts on workers and families who missed out on decent tax cuts and have had low or no wage increase."

Inflation has averaged just under 3 per cent over five years, held up by the non-tradable sectors (where prices are not disciplined by international competition or exchange rate) averaging close to 4 per cent.

The Reserve Bank forecasts annual non-tradables inflation of 2 per cent in the June quarter, but that is as good as it gets. It expects it to be back above 3 per cent in a year.

The impending GST rise is expected to add 2 per cent to the CPI, and the emissions trading scheme will impact on fuel and electricity prices, adding 0.3 per cent.

The Reserve Bank in its June monetary policy statement said it expected the slack in the economy generated by the recession to be eliminated by early next year and that increased pressure on domestic resources would result in higher non-tradable inflation.


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