* The RBNZ engineered a long, harsh recession in order to get inflation back within its 1-to-3% target band. They focus on the 2% mid-point. And we’re close… very close. At 2.2%, inflation has fallen from a rapid peak of 7.3%.
* The RBNZ can declare victory in the war on inflation. And they have acknowledged the success, with rate cuts.
* There is more disinflationary pressure in the pipeline as the economy continues to operate below its productive capacity. Tradables is the reason we have returned to 2%. And the eventual normalisation in domestic price pressures is why we see 2% sustained in the medium-term. It’s the two phases of 2%. Phase 1, imported. Phase 2, domestic.
* The light at the end of the tunnel is burning brighter. Cost pressures are easing. Great news for businesses and households, and interest rate relief is coming thick and fast. Policy settings are still restrictive, but more interest rate cuts are coming. Falling inflation, and falling interest rates will help household budgets, and business opex.
The good news – deflationary pressures are becoming more broad based. There were more goods and services recording declines in prices. And there were fewer goods and services recording hikes in prices.
The bad news – there’s still some very chunky prices hikes in council rates and insurance premiums to pay. The $5 fee for prescriptions also hurt.
Importantly, core inflation recorded a 1% gain on the quarter, and eased to 3.1% over the year.
Beneath the surface, there was some (welcomed) weakness in housing related costs. Despite a sharp 12% increase in council ratees over the quarter, lower labour costs and cheaper materials costs helped on the construction front.
Earlier this year, we had forecast inflation falling back within the RBNZ’s 1-3% target band in the September quarter – but only just (2.8%) given the persistent strength in domestic inflation. While that remains the case, inflation has now fallen to 2.2%. And we still have cheaper imported prices to thank for bringing inflation closer to the RBNZ’s 2% target.
The two phases of deflation.
The first phase is the deflation of prices for imported goods. Known as tradables inflation, imported prices are falling, and are DOWN -1.6% over the year. Imported prices peaked at a whopping 8.7%, and have fallen swiftly with the decline in global inflation rates.
The second phase is the deflating of domestic prices. Domestic inflation is a slow-moving beast. The good news is that it is moving in the right direction (south). Non-tradables prices have eased from 5.4% to 4.9%. It’s fallen some distance from the 6.8% peak, although it is still sitting high above the long-term average (~3%).
