It is a bit embarrassing for the Reserve Bank to be half a percentage point light in its forecast for inflation in the September quarter.

Should it be worried by this miss, and therefore should borrowers?

Not necessarily. But perhaps a little bit.


The surprise was largely, but not entirely, down to petrol prices. Although petrol only makes up about 4 per cent of the consumers price index (CPI), it accounted for 30 per cent of the quarter's 0.9 per cent rise in the CPI and 40 per cent of the annual inflation rate of 1.9 per cent.

Since August 3, when the forecasts for the Reserve Bank's last monetary policy statement were closed off, the imported cost of oil has risen by 19 per cent or $20 a barrel, on MBIE's numbers, driven largely by higher global crude prices. That equates to around 12c a litre.

Reflecting that, tradables or imported inflation was 0.9 per cent in the quarter, making 0.8 per cent for the year, up from 0.3 and 0.1 per cent respectively in the June quarter.

Excluding vehicle fuels, tradables inflation in the September year was minus 1.3 per cent.

It is the sort of price shock that the Reserve Bank should "look through" or ignore — at least until any second round effects become apparent.

So the question is, which of two impacts on the future inflation rate will dominate?

One is cost-push inflation, of the kind the trucking industry has been warning about.

One of the key judgments the Reserve Bank says underpinned its August economic forecasts was that "pass-through of higher petrol prices onto other consumer prices is limited".


That assumption may yet prove complacent. As the Bank of New Zealand's head of research Stephen Toplis reminds us, "one of the lessons of the 1970s oil price shock was that central banks were slow to react to second round effects of the shock, which built upon the broader increase in inflation that was under way."

Another impact will be on inflation expectations, which tend to reflect what consumers are currently experiencing.

In that respect, it might be worth noting that buried among the inflation numbers Statistics NZ releases is a series called "all (CPI) groups plus interest".

The official CPI does not include interest rates. But this "non-standard" measures does include changes to mortgage and credit card interest rates and is arguably therefore a better, albeit rough, proxy for the cost of living.

On an annual basis it has climbed from 1 per cent in the March quarter to 1.7 per cent in the September quarter.

In the context of an increasingly tight labour market, that sort of rise in the cost of living might make a difference to non-tradables or domestic inflation, the part (roughly half) of the CPI that is more in reach of monetary policy.


Then again it might not. One of the puzzles of recent years across the developed world has been the flattening of the Phillips curve, a weakening of the traditional inverse relationship between unemployment and inflation.

It is unclear whether that is a temporary thing or represents some enduring shift, a weakening in the bargaining power of employees in the context of globalisation, de-unionisation and technological change.

In any case, this week's numbers show non-tradables inflation already running higher than the Reserve Bank's August forecast. So it is not all about oil.

Offsetting all of that is the implications of higher petrol prices for aggregate demand.

The more people have to pay at the pump, the less they have to spend on other things.

It has the same effect as a tax increase, except that in this case money that people might have spent on local goods and services flows instead into the blood-stained hands of Vladimir Vladimirovich Putin or Mohammad bin Salman bin Abdulaziz.


So to whatever extent the Reserve Bank was worried about demand outstripping the economy's capacity to supply over the next couple of years, the crowding-out effect of higher petrol prices would tend to mitigate that concern.

One of the key reasons business sentiment has been distinctly grumpy is that firms are already finding it hard to pass on the increased costs they face. A lack of pricing power is compressing margins. That can go on for only so long before something gives.

Given the uncertainty about which of these effects of higher oil prices will prove stronger — more cost-push inflation or less demand-pull inflation — it is unsurprising that there is range of views among market economists about what the latest CPI means for the outlook for interest rates.

At the dovish end, ANZ concludes that it does not take the possibility of an official cash rate cut off the table.

"In light of its medium-term mandate the [Reserve] Bank will look through the transitory impacts of higher petrol prices and minimum wages, while considering their possible adverse effects such as lower discretionary spending (due to higher petrol prices) and softer-than-otherwise employment growth (courtesy of higher wage costs)," said ANZ economist Miles Workman.

At the other, hawkish end of the range, BNZ's Stephen Toplis is struck by the fact that non-tradables inflation — the kind that the Reserve Bank can do more about — came in 0.2 percentage points higher than it had forecast, at a four-year high.


Toplis points to one of the alternative scenarios the central bank sketched in August, in which even a gradual rise of 0.3 percentage points in non-tradables inflation (relative to its central forecast) meant it would lift the OCR a quarter of a percentage point by early 2020 and a full percentage point by mid-2021, compared with half a percentage point under the central forecast.

ASB economist Kim Mundy says the Reserve Bank will continue to watch for evidence of a sustained increase in capacity pressures and wages before it considers raising the OCR, but that that is likely to happen in early 2020.

Westpac's Michael Gordon said that "the odds of a rate cut over the coming year, which we initially put at one in three, are receding." As for the Reserve Bank's view, we will get that on November 8.

Rising fast

Among the big movers in the latest annual inflation figures (to the end of September):

• Housing / household utilities: Up 3.1 per cent
• Transport (incl petrol): Up 5.6 per cent
• Alcoholic beverages / tobacco: Up 4.7 per cent