NZ Q3 CPI Preview: A Generational High

Daily Forex Fundamentals | Written by Westpac Institutional Bank | Oct 18 08 08:07 GMT |

We expect Q3 CPI to rise 1.7%. Annual inflation above 5% for first time in 18 years. Inflation outlook considerably softer, as credit crunch bites. RBNZ focused on financial and economic stability. An eighteen year old will see something for the first time in their life next week - more than 5% annual inflation in New Zealand. The last time annual inflation was above 5% was in 1990 following an increase in GST. We expect annual inflation for Q3 to print at 5.2%, following a 1.7% surge in prices in Q3 itself. At least the quarterly number is within the RBNZ's target band! The market median forecast for the quarter is 1.6%, with a range of 1.2% to 1.7%. The RBNZ had 1.3% for the quarter and 4.9% for the year in their September Monetary Policy Statement. Food, transport, and housing to lift CPI Key drivers behind the increase in the CPI over the quarter are expected to be: Food prices. Rising world food prices and a weather-induced lift in fresh fruit and vegetable prices will see food prices lift 3.6%, boosting the CPI by 0.64 percentage points. Transport prices. A range of influences adding to a 0.44 percentage point contribution. Petrol prices peaked early in the quarter and drifted lower, but petrol prices averaged about 4% higher in Q3 than in Q2. Higher public transport fares and international and domestic airfares on the back of higher fuel costs will add to the transport component in the CPI. We expect lower vehicle prices to partly offset the increases elsewhere in the transport group. Housing-related prices. We expect a 0.27 percentage point contribution to the CPI driven by the usual increase in local authority rates at this time of year and higher household energy prices. Alcohol prices. The annual indexation of excise duty on alcoholic drinks will see a 0.22 percentage point contribution to the CPI. In addition to the expected decline in motor vehicle prices noted above, we also expect falls in the household contents and services group as well as the clothing and footwear group. We suspect some additional discounting occurred as retailers attempted to clear seasonal stock in a generally weak retailing environment. The large increase in food and petrol prices will drive a 2.0% increase in tradable prices, while non-tradable prices are expected to rise 1.3% on housing-related, alcohol (beer) and passenger transport prices. Note too that annual non-tradable inflation is expected to leap from 3.4% to 4.2% as the health and education subsidies from Q3 2007 drop out of the annual calculations. A result on our expectation would be higher than the RBNZ's 3.9% forecast for annual non-tradable inflation published in the September Monetary Policy Statement. Note that estimates of tradable and non-tradable inflation have wider confidence bands this quarter as expenditure weights for these components have not been pre-released with the re-weighting material discussed below. Reweighting: out with the old, in with the new The Q3 CPI will be the first release following the latest regular overhaul of the index. The revamp of the CPI brings in new items (such as heat pumps) and drops others (such as hiring video cassette tapes), and adjusts the weights on items to better reflect recent spending patterns. The old and new weights for the broad groups of the CPI are shown in Table 1. We estimate the upshot from the re-weighting for the immediate quarter is small; at most inflation will be 0.1% higher in Q3 that it would have been if the old weights had been used. This result comes from goods and services increasing in price this quarter (like food, rates and electricity) now having a larger weight, while some goods expected to fall in price this quarter (like clothing and footwear) now having a smaller weight. Beyond the immediate quarter we suspect the re-weighting will see inflation lower than it would have been under the old weights. Take the weight on housing for example. With the housing boom now over, the disinflation effects of the housing slump will now have a larger influence on the overall CPI than under the old weights. The same applies to the increased weight on petrol. That said the influence of the CPI revamp on the inflation outlook appears trivial compared to the radically changing economic outlook and its likely influence on actual prices. Implications Inflation concerns are receding rapidly, despite our expectation that NZ will print its first above 5% annual inflation rate in 18 years. Retreating petrol prices will see headline inflation peel back over the coming 12 months. More fundamentally, a worsening economic outlook as the international credit crunch bites will see previous capacity constraints relax. The RBNZ will remain focused on financial and economic stability over coming months, with current inflation taking a backseat. Westpac Institutional Bank Disclaimer All customers please note that this information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation or needs. Australian customers can obtain Westpac's financial services guide by calling +612 9284 8372, visiting www.westpac.com.au or visiting any Westpac Branch. 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