GDP and Inflation

Consumers Price Index up one percent for the year

Tuesday November 25, 2014 Hugh Dixon

The Consumers Price Index (CPI) rose 0.3 percent between the June 2014 and the September 2014 quarters. This upsurge follows the rise of 0.3 percent for the June 2014 and the March 2014 quarters.


chart consumer prices cpi

The 0.3 percent rise in the CPI for the September 2014 quarter means that annually the CPI has increased by one percent. This is a fall from the 1.6 percent increase seen in the year to June 2014.


chart cpi prices

Annually the largest movement came from the housing and household utilities groups, which averaged an increase of 3.4 percent, thanks to increases in housing rentals and purchases of new housing. The second largest movement came from alcoholic beverages and tobacco where prices increased by 2.7 percent over the year, thanks to increases in the exercise duty paid on both alcoholic beverages and tobacco.


Over the year to September 2014 inflation in goods and services that are or can be exported and imported (such as petrol, toys, and international air fares) decreased by one percent, while those goods and services that cannot be exported or imported (such as housing, local authority rates, and electricity) saw price increases of 2.5 percent.

This fall in the overall annual inflation rate does bring into question the current level of the Reserve Bank of New Zealand Official Cash Rate (OCR), and whether it needs to fall or remain steady for the Reserve Bank of New Zealand (RBNZ) to meet its inflation target.

The RBNZ and the New Zealand Government have an agreement in place that mandates the RBNZ to keep the annual inflation rate in New Zealand as measured by the CPI between one and a third percent. The RBNZ’s main tool to control inflation is the OCR.

The September 2014 monetary policy statement from the RBNZ indicates that the RBNZ believes that the fall in the CPI to 1 percent is a blimp. The RBNZ expects that the strong growth in employment and GDP, along with the 2.5 percent increase in prices for those goods and services that cannot be traded, means that inflation is more likely to increase over the next year or two rather than stay where it is or fall.

Therefore until the annual CPI starts to rise, expect to see the RBNZ keep the OCR at 3.5 percent.