The key word here is “might”.
The RBNZ previously paid a lot of attention to non-tradeable inflation.
Because this tracks goods and services that don’t face foreign competition, it’s seen to be an indicator of domestic demand and supply conditions, and therefore something the RBNZ can influence.
The problem is, quarterly non-tradeable inflation didn’t fall by as much as the RBNZ forecast back in November.
It fell from 1.7 per cent between the June and September quarters to 1.1 per cent between the September and December quarters. The RBNZ expected it to drop to 0.9 per cent.
Back in November, when the RBNZ last reviewed the official cash rate (OCR), it didn’t warm well to non-tradeable inflation being hotter than what was forecast.
Indeed, it surprised everyone by saying it was losing patience and was willing to hike the OCR one more time, and not cut it until 2025.
Should the RBNZ respond to higher-than-expected non-tradeable inflation in the same way it did in November, one could assume the OCR isn’t coming down anytime soon.
Should the RBNZ take a more holistic view of all the components of the inflation data, it could justify erasing the additional OCR hike it had pencilled in, if not bring forward expected OCR cuts.
BNZ head of research Stephen Toplis believed the second approach was the more sensible one, but didn’t know which way the RBNZ would go.
He noted the lines between tradeable and non-tradeable inflation were blurred, so it wasn’t worth fixating too much on one or the other.
For example, furniture is considered tradeable, as its price is influenced by foreign markets. However, interest rates in New Zealand also affected it in the December quarter.
The price of furniture fell by 0.8 per cent in the final three months of 2023, rather than rise like it normally does before Christmas (i.e. the price rose by 5.1 per cent in the December 2022 quarter).
Toplis put this phenomenon down to the RBNZ’s high interest rates working as intended - squeezing people’s budgets to the point they cut their discretionary spending, forcing furniture sellers to lower their prices.
So, while the RBNZ can influence the price of some tradeables, like furniture, there are also non-tradeables it can’t affect the prices of.
Council rates and insurance premiums are good examples of this. Both are continuing to soar as councils scramble to plug infrastructure deficits and insurers lift prices to account for climate change.
Rents are another non-tradeable. The RBNZ’s ability to control these is constrained, as they’re largely rising on the back of record-high immigration.
Again - Toplis believed the RBNZ should take a broader view of the inflation data, rather than say, “The OCR can’t fall until non-tradeable inflation drops right off”.
Whether or not the RBNZ will do so is yet to be seen.
There is another complicating factor. The market has potentially been getting ahead of itself, pricing in three OCR cuts for the year.
The RBNZ might need to keep talking tough to prevent wholesale interest rates from falling too soon.
Toplis recognised RBNZ chief economist Paul Conway would need to carefully word a speech he’s set to deliver - partly in response to the inflation figures - on January 30.
The speech will set the scene for the RBNZ’s next OCR review on February 28.
How it views non-tradeable inflation will be one to watch.
Jenée Tibshraeny is the Herald’s Wellington business editor, based in the Parliamentary press gallery. She specialises in government and Reserve Bank policy-making, economics and banking.
