The CPI result for the June 2012 quarter was +0.3% giving an annual figure of +1.0%.  The quarterly figure was generally below market expectations and importantly, it brings inflation to  the bottom end of the RBNZ’s 1-3% target range.  Food and fuel prices were flat while the stronger NZD assisted in bringing down prices for imported/traded goods such as clothing, footwear and appliances.  Prices for the tradable sector overall fell by 1.1% for the period.   Lower inflation is to be welcomed as it assists in bringing down inflation expectations.  By contrast, last year the headline CPI result was running at over 5%pa, which was having the opposite effect  – ie pushing upwards the consumer’s view of future price rises albeit that the 2011 figure included a GST rise.

The CPI result yesterday is unlikely to alter the stance of the RBNZ, particularly as non-tradable inflation was recorded at 2.4%.  The RBNZ will most likely keep the OCR at current levels because its focus is as much on future pricing trends as it is on today’s number and it will take a cautious stance given that medium term indicators such as capacity utilisation and the supply of labour, already indicate tighter conditions.  Moreover, a main contributor to the quarterly CPI number was from housing reflecting higher electricity prices, rentals and the rising cost to purchase new dwellings which will be of concern to the RBNZ, particularly as the local banks attempt to fuel rising confidence in the housing sector with lower mortgage rates. 

Overall however, it should be remembered that the RBNZ is currently maintaining a stimulatory interest rate setting driven largely by the sluggish state of the world economy and the desire to protect the local economy from a material downturn in activity.  So any sign of improved world growth and an increase in pricing expectations locally, will no doubt see the OCR reviewed sooner rather than later, or at least a change in the RBNZ’s rhetoric.           

Graeme Thomas