- Higher food and fuel prices expected to underpin a 0.8% increase in the Q2 CPI.
- Post-earthquake rebuilding activity and general recovery to see inflation pressures lift over 2012.
- RBNZ becoming less comfortable with recent inflation developments.
We expect the CPI to increase by 0.8% in the June quarter, driven by higher fuel prices. Excluding the increase in fuel prices, we expect tradable inflation to be subdued. This reflects the effects of the high NZ dollar over the past year, which would have given retailers scope to discount in the face of soft household demand. We also expect subdued domestic demand kept a lid on non-tradable in the June quarter.
A host of Government charges over the past year - including the GST increase, tobacco excise taxes, higher ACC levies and implementation of the Emissions Trading Scheme - has boosted the headline CPI.
As a result, we expect annual growth in the CPI to peak at 5.2% in the year to June.
The Policy Targets Agreement allows the RBNZ to look through the first round effects of these Government charges.
What matters for the RBNZ is whether there are any flow-through effects to medium-term inflation.
Two year-ahead inflation expectations and pricing intentions provide useful insight into how inflation pressures in the NZ economy are evolving.
The increase in both these measures in recent months suggests inflation pressures are growing in the NZ economy.
These recent developments will likely make the RBNZ increasingly uncomfortable. Nonetheless, the RBNZ has indicated it would like to see the underlying recovery firmly underway before it lifts the OCR, and we expect the RBNZ will leave the OCR on hold until January 2012.
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