The consumer price index increased 6.7 per cent in the 12 months to March 2023, according to figures released by Stats NZ today.
The 6.7 per cent increase followed a 7.2 per cent increase in the 12 months to December 2022. But despite the decrease in rate, inflation was still high.
Price pressures appear to have peaked and the Reserve Bank may not have to raise interest rates so aggressively in the next round of OCR decisions.
”Inflation is still at levels not seen since the 1990s,” Stats NZ consumer prices senior manager Nicola Growden said.
It was already sitting at 7.2 per cent for the year to December.
The New Zealand dollar dropped by a quarter of a US cent to US61.75c on this morning’s news.
Food the biggest inflation driver
Food was the largest contributor to the March 2023 annual inflation rate, Stats NZ said.
This was due to rising prices for vegetables, ready-to-eat food, and milk, cheese, and eggs.
Vegetable prices increased 22 per cent in the 12 months to March 2023, while ready-to-eat food and milk, cheese and eggs increased 9.7 per cent and 15 per cent respectively.
After food, the next largest contributor to the annual increase was housing and household utilities.
The increase was due to rising prices for both construction and rents.
Prices for building a new house increased 11 per cent in the 12 months to March 2023, following a 14 per cent increase in the 12 months to December 2022.
”Respondents reported that higher costs of materials and labour continued to drive the increase of building a new home,” Growden said.
Market reaction expected
The Australian/NZ dollar cross rate dropped to A92.00c from A92.40c on the news while the two-year swap rate – which has an influence on home mortgage rates – fell five basis points to 5.20 per cent.
Westpac senior markets strategist Imre Speizer said he expected more of a reaction in the financial markets to play out over the next few hours.
”Interest rates have yet to fully register their response – you will have to wait a bit longer,” he said.
”The core inflation pressures have not intensified and have not strengthened any further. Overall, it should be good news for the Reserve Bank.”
Non-tradeable inflation was 6.8 per cent in the 12 months to March 2023, the highest since the series began in June 1999.
The 6.8 per cent increase was driven by higher prices for construction, rents, and ready-to-eat food.
Non-tradeable inflation measures final goods and services that do not face foreign competition and is an indicator of domestic demand and supply conditions. However, the inputs of these goods and services can be influenced by foreign competition.
Tradeable inflation was 6.4 per cent in the 12 months to March 2023, driven by higher prices for international air transport.
Tradeable inflation measures final goods and services that are influenced by foreign markets, like oil prices.
In February the Reserve Bank had forecast annual inflation was on track for 7.3 per cent as impacts from the cyclone and flooding events drove up fresh food prices and construction costs.
The RBNZ will pay particular attention to the split between tradable inflation (international costs like oil prices) and non-tradable (domestic inflation underpinned by rising wages).
There were fears domestic, non-inflation has become embedded in the economy and will continue to rise even as the topline number stabilises or falls.
Economists still see it as likely the RBNZ will deliver one more 25 basis point rate hike at its next review on May 24 - taking the Official Cash Rate to 5.5 per cent.
Westpac economists came the closest to picking the number - forecasting 6.9 per cent.
BNZ and Kiwibank economists forecast 7.1 per cent; ANZ and ASB economists 7.2 per cent - the level it was in the December and September quarters.
Around the world, inflation remains high although it appears to have peaked in Australia and the US where it now sits at 6.8 per cent and 4.98 per cent respectively.
In the UK, new data last night showed the inflation rate stuck in double digits at 10.1 per cent.
Finance Minister Grant Robertson welcomed the news, which came despite cyclone impacts driving up food prices.
“While lower than expected, today’s result is still elevated by the impact of flooding and cyclone events on food prices, with prices increasing 8.6 per cent for vegetables. The prices of second-hand cars and insurance were also elevated. The effects of the cyclone will flow through into the June quarter results as well,” he said.
“Treasury forecast inflation will be 0.4 percentage points higher in the first half of the year because of the extreme weather. We don’t have control over what the weather does, but we know it puts a strain on household budgets.”
The cost of living remained the main challenge in the economy and would be a major focus in May’s budget.
“Our policy reprioritisation review has netted $1 billion in savings so we can do more to support New Zealanders at this challenging time,” Robertson said.
The Government was reducing spending to more normal levels and aiming to reduce overall demand in the economy.
The latest figures show central government consumption fell 2.8 per cent in the December quarter and 1 per cent in the previous quarter, he said.
