Falling dairy prices, high kiwi dampen inflation

Christina Leung.
Christina Leung.
Interest rates are sure to rise next week but falling dairy prices and the continually high New Zealand dollar may cause the Reserve Bank to rethink its strategy to curb inflation.

Statistic New Zealand's consumer price index, the official measure of inflation, was lower than expected in both the March quarter and year ended March.

In the quarter, inflation was only 0.3%, below market forecasts of 0.5%. Annual inflation was 1.5%, below market forecasts of 1.7% and the December annual rate of 1.6%.

''We see an April official cash rate increase as almost certain and it has been fully priced by markets,'' ASB economist Christina Leung said.

''We expect the Reserve Bank will hike in April and then wait until July before following up.''

However, the risk of the central bank lifting the OCR in June, rather than the ASB forecast of July, was high given market pricing was about 80% of the way there.

Factors such as the swift weakening of dairy prices and the stubbornly-high New Zealand dollar were reasons for the Reserve Bank to be cautious, she said.

The main inference from the CPI was tradeable inflation remaining surprisingly contained. Despite rising spending and consumer confidence, retailers were struggling to pass on further price increases.

There were no other material implications from the release for further inflation pressures, Ms Leung said.

Looking to the detail of the CPI, Ms Leung said the 0.7% fall in tradeable inflation reflected discounting across a range of imported household items, including clothing and footwear, as well as furniture and appliances.

''These results suggest retailers continue to face competitive pricing pressures, despite the improvement in household demand and the recent tick-up in pricing intentions in business surveys.''

The 1.1% increase in non-tradeable inflation was slightly softer than expected, she said.

It largely reflected weaker-than-expected alcohol and tobacco prices in the quarter, despite the ''substantial'' contribution from the 10% increase in tobacco-excise tax that came through every March quarter.

The improvement in housing-related costs was in line with expectations. Construction costs rose 1.2% and rents increased 0.6% over the quarter.

The Reserve Bank releases its next OCR statement on April 24.

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