There were lumps and bumps on either side: an increase in tobacco excise added 0.2% to inflation, while a fall in food prices knocked a similar amount off the index. But the underlying story is clear. Inflation has been hobbled by the combined effect of last year’s recession and the strong rebound in the exchange rate.

Domestic inflation has risen a little in response to the economic recovery.  Housing-related inflation, in particular, is picking itself up off the floor.  Construction and property maintenance inflation accelerated, and rents continued to rise at 0.5%, compared to 0.3% a year ago. The strong exchange rate kept tradables inflation low, although not quite to the extent we expected. Food prices fell sharply, but car prices rose 2.4% and appliances were up 1.2%.

The headline measure will have been comforting to the RBNZ, but the details less so. The shortfall relative to their forecast of 0.5% in the March Monetary Policy Statement was probably due to subsequent information on food prices.
Meanwhile, non-tradables inflation picked up to 0.6% for the quarter, exceeding their expectations.

Past Westpac Weekly Commentary
Weekly Commentary 19 July 2010  >>