New Zealand’s CPI inflation likely to have accelerated in Q2 on recovery in fuel prices

New Zealand’s consumer price index inflation for the second quarter is likely to accelerate 0.5 percent. The quarterly acceleration of inflation is likely to raise the annual inflation rate to 0.5 percent, a second modest rise after bottoming out at 0.1 percent by the end of last year, said Westpac in a research report.

The acceleration in the second quarter inflation is likely to be driven by the current gains in the housing related categories and a recovery in fuel prices.

The gyrations in global oil prices are expected to considerably contribute to the nation’s CPI. In the first quarter of 2016, the decline in fuel prices negatively contributed 0.35 percentage points from the CPI. In the second quarter, fuel prices are expected to add 0.25 percentage points, according to Westpac. Swings in the petrol prices are expected to be seen in the third quarter as well.

Keeping fuel aside, certain modest upward pressure on tradable goods prices is likely as the depreciation of NZD in 2015 continued to have a lagged impact, noted Westpac. Meanwhile, the current pressures in the housing market signify that additional stronger growth is expected to be seen in rents and newly-built dwellings' prices. Rises in price of these two categories are currently at around 2.5 percent and 5 percent per year respectively.

Given that the global oil prices have rebounded from their sharp declines earlier in the year, the risk of New Zealand falling into deflation appears to have passed, according to Westpac. However, the return to the midpoint of the RBNZ’s inflation target is expected to be a very gradual process. Also, the sharp appreciation in NZD in recent weeks is sustained.

“Our forecast is below the Reserve Bank’s forecast of a 0.6 percent increase, although we’d add that our forecast is a ‘high’ 0.5 percent, meaning we see a slightly greater chance of it turning out higher”, noted Westpac.

An outrun below the central bank’s forecast may assist in turning the market’s focus away from housing and financial stability worries and bring it back towards the primacy of the central bank’s inflation target. However, the stronger NZD already poses a huge challenge to the outlook of the inflation, said Westpac.