New Zealand June quarter CPI expected to disappoint

The consumer price index data for the period ending June for New Zealand is expected to released this week. The economists polled are forecasting a 0.2% increase on a quarterly basis.

This would signal a sharp slowdown in inflation from the 1% gain in prices registered in the March quarter. The gains in March were led by a spike in food and fuel prices.

The RBNZ’s forecast for inflation stands at 0.3% for the June quarter, slightly above the consensus estimates. It is no secret that New Zealand’s consumer price index is often influenced by temporary factors.

On a year over year basis, New Zealand’s consumer prices are expected to rise 1.9%, slowing from 2.2% year over year increased in March 2017.

Weaker CPI expected due to lower food prices

Food prices, which played an important role in pushing inflation higher in the March quarter is yet again expected to play a key role for the June quarterly inflation report. Last week, data showed that food prices rose just 0.2% in June. This was down from the 2.4% gains registered the month before.

The decline in food prices came about on weaker vegetable prices which spiked in the previous months.

As a result, the weakness in the food prices is likely to reflect in the overall inflation report with the expectation that the quarterly inflation could slow and come out below estimates.

The weakness in the inflation report could however not spring any surprises for the RBNZ. The central bank had already downplayed the recent surge in inflation at the subsequent monetary policy meetings after the March quarter inflation report was released.

Thus, as far as monetary policy is concerned, a weaker than expected inflation rate is unlikely to influence the RBNZ much.

Excluding food and fuel prices, the core consumer price index suggests that it is on a more firm footing. Core inflation already bottomed out in 2015 and has been rising gradually. It still remains below the RBNZ’s 2% mid-point target band for inflation.

This continued increase in the core inflation also hints that while the New Zealand’s economy is growing, it is far from overheating. Thus, it warrants a relatively stable period of interest rates.

The weakness in the inflation could however impact the markets. This is due to the fact that there is broad prevailing view that the RBNZ could also join onboard the club of central banks which are turning increasingly hawkish.

Expectations are strong that the RBNZ could hike the OCR as early as June next year.

At the May monetary policy meeting, the RBNZ’s dovish statement took the markets by surprise. The central bank noted that “monetary policy will remain accommodative for a considerable period.” This came right after the March CPI quarterly report which showed a strong gain in consumer prices.

The RBNZ Governor Wheeler said “We’re not going to see a burst of inflation in this economy. The story behind these forecasts is that we’re not seeing the build-up in inflation pressures that some other commentators are seeing.”

This could very well be true especially if the June CPI report for New Zealand will show a pullback in consumer prices. The New Zealand dollar has been trending sharply and made a modest pullback to 0.7213 last week after posting highs near 0.7340.

A breakout from this high is essential to keep the bullish trend intact. However, a weaker than expected CPI data could see some profit taking ahead of the CPI report. Immediate support in NZDUSD is found at 0.7213 followed by 0.7055.