Consumers price index
No guarantee of rate cuts this year, despite 3.3%pa inflation
17 Jul 2024
Our take on the latest Consumers price index (Wed 17 Jul 2024)
Inflation down to 3.3%pa
Services inflation steady at 5.3%pa
Timing of OCR cuts remains uncertain
The key numbers...
- Inflation eased from 4.0% to 3.3%pa in the June quarter. The quarterly lift in the consumers price index was in line with our pick of 0.4%, but slightly below expectations of financial markets (0.5%) and the Reserve Bank (0.6%).
- Although the headline number was favourable, services inflation held steady at 5.3%pa, and non-tradable inflation was slightly higher than the Reserve Bank had expected (5.4%, down from 5.8%pa in the March quarter).
- Many of the biggest contributions to the quarterly result were largely outside the Reserve Bank’s sphere of influence: rents (up 1.2%, with the 4.8% annual increase the fastest since 1997), electricity (up 3.0%, the biggest quarterly increase in 12 years), and dwelling and contents insurance (up 5.1% and 3.5% respectively).
- These increases were partly offset by lower prices across several food categories, clothing, tools and appliances, some transport costs, and recreation and culture. Some of these price falls reflect a combination of weaker international inflation pressures, as well as softer demand within New Zealand leading to more discounting.
Non-tradable inflation is easing, but is it enough?
CPI components, annual % changes
...and our reaction
- Today’s inflation data was good, but at this stage we still expect the Reserve Bank to keep the official cash rate at 5.5% until early 2025. The Bank is likely to have lingering concerns about services-based and non-tradable inflation remaining high.
- Most trimmed mean measures of inflation (which exclude the biggest outliers in quarterly movements, to gauge the underlying trend in inflation) showed a 0.7% quarterly increase for June, in line with the previous two quarters. These figures are well down from the 2021-23 period, but they are still 0.1-0.3 percentage points higher than the norm throughout the two decades prior to the pandemic.
- Headline inflation is likely to be back within the Bank’s 1-3%pa target band next quarter. This milestone will make it increasingly difficult for the Bank to resist calls for earlier easing, meaning that a reduction in the official cash rate in November should be a live possibility.
- However, the Bank’s inconsistent messaging, and its May forecasts showing the official cash rate at 5.5% until the September 2025 quarter, make it difficult to be confident of an earlier move. We note that keeping the official cash rate at 5.5% until February next year will probably result in economic activity being constrained for longer than is necessary.
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