New Zealand recorded inflation that met the Reserve Bank's forecast in the first quarter, as an increase in tobacco tax, food and housing-related costs offset the impact of low fuel prices.

The consumers price index rose 0.2 percent in the first quarter, for an annual increase of 0.4 percent, Statistics New Zealand said. The biggest contribution to inflation in the quarter and the year was the 10 percent annual increase in the excise on tobacco, the last scheduled increase. The New Zealand dollar gained to 69.08 US cents, from 68.90 cents immediately before the data was released.

Traders now favour a cut to the official cash rate at the April 28 policy review, with odds of 53 percent for a cut and 46.9 percent unchanged based on the overnight index swap curve. The bank has projected that annual inflation will return to its 1 percent-to-3 percent target band in the fourth quarter and reach the 2 percent mid-point by March 2018.

Cigarettes and tobacco contributed 25 basis points to both the quarterly and annual CPI, while housing rentals and purchases of newly built homes both added 0.22 percentage points to annual inflation.


Petrol recorded the biggest decline in the quarter, at 7.7 percent, contributing 0.34 percentage points. In the year, prices of 'other private transport services' dropped 23 percent and petrol prices fell 5.1 percent, taking away 0.31 percentage points and 0.22 percentage points respectively from annual inflation.

Falling global crude oil prices have ensured tradables inflation has continued to decline and in the first quarter that measure dropped 0.9 percent. Non-tradables inflation, which reflects those goods and services that don't face foreign competition and shows how domestic demand and supply conditions are affecting consumer prices, rose 1 percent.

In the year, the tradables component fell 1.2 percent and non-tradables rose 1.6 percent.

The Reserve Bank next updates its forecasts in the monetary policy statement on June 9.

In a recent speech, Deputy Governor Geoff Bascand said much of the weakness in inflation could be attributed to falling commodity prices and a high New Zealand dollar. But he also pointed to higher productive capacity "from rapid growth in the labour force" which was keeping a lid on wage inflation as the economy grew.

Supply and demand in the labour market had been "broadly in balance since early 2014, creating little upward pressure on wages," Bascand said.

Fruit prices contributed 0.09 percentage points to quarterly inflation, while rentals for housing added 0.06 points and purchases of newly built homes added 0.04 points.
After petrol, the biggest downward pressures came from international air fares, taking away 0.27 percentage points, package holidays, down 0.09 points and domestic airfares, down 0.03 points.

The so-called trimmed mean, which excludes extreme price movements, fell 0.2 percent in the year, including cigarettes and tobacco, but rose 0.7 percent excluding petrol. Excluding housing and household utilities, the annual CPI declined 0.4 percent.

See the latest CPI figures from Statistics NZ here: