NZ CPI Preview: Forecasts from four major banks, inflation likely to take a step downwards

We expect annual CPI inflation to decelerate sharply to 4.7% YoY in Q4, below the RBNZ’s November MPS forecast of 5.0% YoY. However, the expected downward surprise versus RBNZ’s November forecast is driven entirely by the tradables component, which we expect to fall from 4.7% to 3.4% YoY. We expect non-tradable inflation of 5.7% YoY, in line with the RBNZ’s November forecast. Given the RBNZ’s focus on this component, it’s surprises here that will matter for the OCR outlook, particularly in context of the RBNZ’s impatience as expressed in the November Monetary Policy Statement. We see the risks as balanced around 5.7%. We expect the suite of core inflation measures to move materially lower. This is absolutely what the RBNZ needs to see, but we are cognisant that these measures are also influenced by weaker tradable inflation, whereas the RBNZ’s primary focus is domestic inflation risks.

Inflation is set to again fall short of the RBNZ’s forecasts. We expect consumer prices to have risen by 0.5% in the December quarter, leaving them up 4.7% over the past 12 months. In contrast, the RBNZ’s last published forecasts assumed a 0.8% rise over the quarter (+5.0% for the year to December). Our lower inflation forecast reflects softness in the prices for volatile items like international airfares and food over the past quarter, as signalled by Stats NZ’s expanded suite of monthly price indicators. The bigger question is what’s happening to the underlying trend in prices. We expect most core inflation measures – including measures of domestic price pressures – will moderate, but remain at levels well above the RBNZ’s target range.

We expect Q4 CPI inflation to print on consensus at 0.5% QoQ (RBNZ: 0.8%), decelerating sharply from the 1.8% QoQ in Q3. This lifts the annual headline to 4.7% YoY, also much lower than 5.6% YoY last quarter. Food prices are likely to be a big drag this quarter, down 1.1% QoQ while petrol prices continue to be on the retreat. However, rent prices appear more sticky and could be a concern to the RBNZ, especially after it flagged that strong population growth poses upside risk to inflation. If CPI inflation does print below RBNZ's forecast, the RBNZ may scale back its hawkish rhetoric at the Feb meeting given the disappointing economic data (e.g., GDP, labour market) in Q4.

We recently updated our estimates for the fourth quarter CPI in New Zealand, and expect a 0.4% QoQ print which translates into 4.6% YoY. Consensus is centred at 4.7%, signalling that expectations are for a marked undershot compared to the latest RBNZ fourth quarter CPI projections at 5.0%.