New Zealand Consumer price inflation was slightly stronger than anticipated

Consumer price inflation was slightly stronger than the market anticipated in the September quarter. Annual non-tradables inflation fell to 1.5%, the lowest annual rate since December 2001, and was slightly weaker than expected. This reflects genuinely subdued inflation domestic inflation pressures as well as the decline in ACC levies.

However, tradables prices were up 0.7% in the quarter, and were slightly stronger than expected. Some of this surprise on tradables inflation is "genuine", and suggests that the falling exchange rate is indeed passing through to NZ inflation. However, part of the surprise relative to the forecast probably represents timing issues. Stats NZ's measure of petrol prices didn't fall and the measure of domestic airfares rose instead of falling. 

"We suspect that these issues will reverse in the December figures. At first glance, we are inclined to reduce our December quarter CPI forecast by 0.1% after today's figures.Our long-held view has been that low inflation will force the Reserve Bank to reduce the OCR below 2.5% in 2016", says Westpac Research.

By contrast, the RBNZ argues that the lower exchange rate will prompt sufficient inflation, meaning the OCR will only need to fall to 2.5%.Today's data leans more in favour of the RBNZ's view, but only slightly.

The inflation outlook for next year remains very subdued. Consequently, today's surprise is not sufficient to dissuade from forecasting a 2.0% low-point in the OCR. NZ interest rates rose around 1 or 2 basis points, and the NZD was up a fifth of a cent against the USD.