Consumer prices rose 1.1% in the June quarter and are up 6.0% over the past year. The result was close to our own forecast and the RBNZ expectations. The underlying details were firm.
Consumers Price Index, June quarter 2023
Quarterly change: +1.1% (prev: +1.2%)
- Westpac: +0.9%, RBNZ (May MPS): +1.1%
- Median market f/c: +0.9%, range +0.8% to +1.2%
Annual change: +6.0% (prev: +6.7%)
- Westpac: +5.9%, RBNZ: +6.1%, Market f/c: +5.9%
Key points
- New Zealand consumer prices rose 1.1% in the June quarter, with prices up 6.0% over the past year.
- Today’s result close to our own forecast and the RBNZ expectations.
- Inflation has slowed from the eye-watering rates of over 7% that we saw last year.
- However, while inflation is ‘lower’, it is not ‘low’ by any stretch of the imagination. Importantly, measures of core inflation are continuing to run at rates of around 6%, and some have actually picked up in the June quarter. That points to lingering strength in underlying price pressures.
- Similarly, domestic inflation (aka. non-tradables inflation) remains elevated at 6.6%.
- Those simmering underlying price pressures mean that inflation is unlikely to return within the RBNZ’s target band any time soon.
Details
The 1.1% rise in prices over the June quarter was related to large price swings in some specific areas.
- Food prices were again the major factor that has pushed overall household living costs higher. Food prices rose by 2.2% over the June quarter and are up a massive 12% over the past year.
- Housing costs have also continued to be key contributors to overall inflation. Housing rents rose by an average of 1.1% over the past three months and are up a solid 4.2% over the past year. Rents are the largest single component of the CPI, and they have been rising at a rapid pace for over a year now.
- In addition, the cost of purchasing a new dwelling is continuing to climb, rising by 1.1% over the quarter. But while that was a solid rise, it’s much more moderate than the oversized increases we saw over the past few years when low interest rates and shortages of materials saw construction costs surging.
- Providing some offset to those increases was the fall in petrol prices, with prices at the pump dropping by around 1.5% over the June quarter.
Looking at the change in prices over the past twelve months, annual inflation has slowed to 6.0%, down from 6.7% at the start of this year and a peak of 7.3% last year. Nevertheless, inflation remains uncomfortably high.
- The fall in the annual inflation rate is almost entirely due to petrol prices, which are 15% lower than this time last year.
- Also contributing to the easing in the annual inflation rate, we’re now seeing more moderate increases in construction costs as building activity has slowed and earlier supply chain pressures have eased. Those conditions have seen annual construction cost inflation more than halving from over 18% last year to 7.8% now.
But while there have been some large swings in some specific prices, the bigger focus for the RBNZ is the longer-term trend in prices. On this front, most measures of core inflation (which smooth through the quarter-to-quarter swings in prices and track the underlying trend in inflation) are continuing to track at levels of around 6% – well outside the RBNZ’s 1% to 3% target band.
Notably, several core measures have pushed higher over the past few months, highlighting the continued strength in pricing pressures.
Looking across the broad product groups, domestic (aka. non-tradable) prices were up 1.3% in the June quarter and have risen by 6.6% over the past year. The RBNZ pays particular attention to non-tradables inflation given its close connection to the strength of domestic economic conditions. The central bank had forecast non-tradable prices to rise 1.0% over the quarter, and 6.3% in the year to June. Non-tradables inflation is lingering at high levels, and has only nudged back slightly in the 18 months since the RBNZ began raising the OCR.
Prices for imported goods (sometimes referred to as tradables) rose by 0.8% over the past three months and are up 5.3% over the past year. That’s a further stepdown from the rates we saw last year. However, that’s mostly due to the fall in fuel prices. Other tradable prices are up 8.4% over the past 12 months.
What does today’s result mean for the RBNZ?
While today’s outturn was in line with the RBNZ’s forecast, we suspect the underlying details of the inflation report were actually firmer than the central bank anticipated. In particular, non-tradables inflation was stronger than the RBNZ expected, and is yet to show material signs of cooling. In fact, excluding building costs, non-tradables inflation picked up to 7.1% in the year to June (vs 6.5% in the year to March), with services prices up 6.1% over the past year.
In its recent policy updates, the RBNZ signalled that it expected to keep the OCR at the current level of 5.50% for some time yet. However, with underlying price and wage pressures remaining firm, the RBNZ still has a rocky road ahead. Inflation looks unlikely to be back within the target band before the latter part of next year.
It’s also a mixed picture on the activity front. We are seeing signs that demand is cooling, including sluggish retail spending. But at the same time, we are seeing signs that the economic cycle may still have some legs (such as the turnaround in net migration, and signs that the housing market may be heating up again).
Putting this all together, we continue to see the risk that the RBNZ will need to raise the OCR again.
