Why the big fall in inflation isn’t as good as it looks (and is Taylor Swift to blame?)

Swiftflation? Taylor Swift performs during The Eras Tour at SoFi Stadium in Inglewood, California. Photo / Getty Images

Economists warn that the big fall in New Zealand’s annual inflation rate, from 4.7 to 4 per cent, is masking sticky pricing for non-tradeable goods and services.

NZ’s consumers price index increased 4 per cent in the 12 months to the March 2024 quarter, according to figures released by Stats NZ today.

The 4 per cent increase follows a 4.7 per cent increase in the 12 months to the December 2023 quarter.

That was broadly in line with economic forecasts and brings NZ’s inflation rate down to the lowest level since June 2021.

But that is about where the good news ends.

“The details were not as good as the headline suggests,” KiwiBank chief economist Jarrod Kerr said.

“The decline in price pressure came from offshore. Tradeables inflation fell to 1.6 per cent (well below our forecast of 2.2 per cent). That’s great, we’ll take it.

“But domestically generated inflation surprised on the upside. Non-tradeables fell just 0.1 per cent points to 5.8 per cent. It’s not enough. The stuff the RBNZ is trying to restrain is proving to be even more frustrating.”

Non-tradeable inflation measures final goods and services that do not face foreign competition and indicates domestic demand and supply conditions.

Tradeable inflation measures final goods and services that are influenced by foreign markets.

“The devil was in the detail,” Westpac senior economist Satish Ranchhod said.

“The softness in today’s result was entirely due to lower tradeable prices, with falls for items like used cars and apparel. In contrast, non-tradeables inflation was hotter than we or the RBNZ had expected.”

Housing and household utilities were the largest contributors to the annual inflation rate, Stats NZ said.

This was due to rising prices for rent, construction of new houses, and rates.

Rent prices increased 4.7 per cent in the 12 months to the March 2024 quarter, while construction of new houses and rates increased 3.3 per cent and 9.8 per cent, respectively.

The next largest contributor to the annual increase was recreation and culture, due to rising prices for international accommodation, and cultural services (which includes items like subscription TV, cinema tickets, and zoo admission).

Prices for international accommodation increased 20.8 per cent in the 12 months to the March 2024 quarter, following a 6 per cent increase in the 12 months to the December 2023 quarter.

Overseas accommodation prepaid in NZ rose 6.8 per cent in the quarter and contributed 0.13 of the 0.63 quarterly movement.

Ranchhod noted this coincided with the Taylor Swift concerts in Australia pushing up accommodation costs for a large group of Kiwi “Swifties”.

Swift’s incredible popularity has been implicated in short-term inflationary spikes as she tours around the world and has been dubbed Swiftflation.

However, BNZ’s head of research Stephen Toplis argued the Reserve Bank should shake it off as this was a one-off issue that could be looked through.

“Many of the significant current drivers of non-tradeables inflation, such as insurance, rates and tobacco taxes, are largely unaffected by monetary policy,’ he said.

Cigarette and tobacco prices, for example, rose 6.5 per cent in the March 2024 quarter. The annual tobacco excise tax increase occurred on January 1, 2024.

“The average price of a pack of 25 cigarettes was $54.27 in March 2024 and one cigarette now costs about $2.17, Stats NZ said.

Cigarette and tobacco prices rose 6.5 per cent in the March 2024 quarter.

“More important to us is what the core measures are doing. In this regard, while the broader trends in these measures are still downward there was the sense that the decline paused in the quarter,” BNZ’s Toplis said.

‘There was nothing in [the] data that might spook the central bank, equally, there was nothing in the data that would have the bank scurrying to bring forward its rate cut agenda,” he said.

“We still believe the bank can cut rates before the end of this year but that’s because we, and the bank, are forecasting that annual inflation will be well within its 1 per cent to 3 per cent target band when the September quarter CPI is published in October.

Others were not so confident.

“While some of the price increases remain outside of the RBNZ’s control, it will want to see more sustained evidence that non-tradeable and core inflation will fall below 3 per cent,” said ASB senior economist Kim Mundy.

“We don’t think the data suggest the RBNZ needs to do more, so to speak.”

Activity data was very weak and highlighted that monetary policy was working, she said.

“However, absent [was] more pronounced evidence that domestic and core inflation measures are heading back to target, there is a risk that the RBNZ joins the slower to lower camp of central banks. As a result, we think the RBNZ will wait until February 2025 to cut the OCR.”

The RBNZ still has an early 2025 forecast for its first-rate cut, but many other economists have suggested November was more likely.

Markets, which had been even more optimistic about early cuts, pulled back the odds on an August cut after the data.