NZ CPI Preview: Forecasts from four major banks, inflation going the right way, but still a long way to target

We expect annual CPI inflation to decline to 5.9% in Q2 2023, below RBNZ’s May MPS forecast of 6.1%. The bulk of the decline in annual headline inflation reflects an anticipated sharp fall in annual tradeable inflation from 6.4% to 5.3%, as the price increases seen in the wake of the war in Ukraine last year fall out of the annual calculation. We expect annual non-tradeable inflation is also past its peak, falling from 6.8% to 6.4%, still roughly twice the level consistent with the RBNZ’s overall CPI target. We’ll be looking for further moderation across the suite of core measures. All up, a faster deceleration in annual inflation will certainly be welcomed by the RBNZ. We don’t see the figures as deterring the RBNZ from their current strategy to hold the OCR unchanged while they ‘watch, worry and wait.’ However, we suspect non-tradeable inflation will prove persistent later in the year. If we’re right, that will only become evident once some large base effects roll out of the equation.

We expect NZ Q2 CPI to rise by 0.8% in Q2 (0.84% to two decimal places).  The QoQ forecast, if realized, would be the slowest increase in aggregate prices since December 2020 and would moderate the YoY inflation pace from 6.7% to 5.8%. The YoY forecast is also 0.3pp below the RBNZ’s forecast of 6.1% and would show disinflation marginally ahead of the timetable expected by policymakers. We attribute their lower CPI forecast to the outlook for lower GDP growth than the RBNZ and expect CPI to continue underperforming the Bank’s published forecasts, returning within the 1% to 3% target band in Q1’24 rather than the Q3’24 expected by the RBNZ. However, this is unlikely to produce a dovish change of rhetoric from the MPC in the near-term. It will likely take at least one further CPI print showing faster disinflation to move official policy rhetoric forward from the current guidance of late 2024. The RBNZ would also have to consider the labor market, where employment arguably remains above a maximum sustainable level. It is therefore more likely that a change in rhetoric would come towards the end of 2023 if economic conditions evolve. Based on this outlook, we continue to forecast the first OCR cut to occur in Q124.

We expect Q2 CPI inflation to slow markedly to 0.9% QoQ, down from the 1.2% QoQ last quarter. Our forecast is below the RBNZ's 1.1% QoQ forecast and we expect the annual CPI to print at 5.8% YoY (Q1: 6.7%). The swift sequential QoQ slowdown in inflation momentum should come as a relief to the RBNZ after its pause in July as rate hikes begin to cool demand-side price pressures in the economy. We expect declines in transport/petrol prices to cool inflation in Q2, while non-tradeable goods inflation (i.e., domestic-oriented) is also likely to retrace as economic activity contracts. Overall, we think the bar now is much higher for the RBNZ to restart its hiking cycle, even if CPI surprises to the upside. The July MPS suggests that the RBNZ is confident that its rate hikes are having their intended impact on consumption and inflation, allowing the Bank to monitor developments from the sidelines.

We estimate that New Zealand consumer prices rose by 0.9% in the June quarter. That would see annual inflation slipping to 5.9%, down from 6.7% in the year to March. But while headline inflation is dropping back, underlying price pressures remain strong. Measures of core inflation are set to linger at levels of around 5% to 6%. The June quarter saw a further large increase in food prices. Those increases have been partially offset by falls in fuel prices. Our forecast is lower than the RBNZ’s last published projection reflecting a lower forecast for tradable prices.