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28 Dec 2015
NZ inflation: A fifth consecutive year below mid-point of target range? – Goldman Sachs
FXStreet (Delhi) – Research Team at Goldman Sachs, suggests that despite having printed below the mid-point of the RBNZ’s target range now over four consecutive years, there is nothing to suggest that overall inflation pressures won’t remain very subdued over forecast period.
Key Quotes
“Reflecting this, our forecasts do not see inflation returning to +2.0%yoy until around mid-2018, as a mix of sub-trend growth and gently rising unemployment weigh increasingly on the non-tradable components of the inflation basket. Specifically, non-tradables inflation is expected to sequentially ease through 2016 to ~+1.1%yoy, and to recover only gradually to an ~1.75% average rate in 2017 and 2018. In context, this is materially below its long run average (+3.6% since 1989).”
“Our forecasts do however reflect offsetting price reflation on the tradables side, with annual growth having likely bottomed at ~-2.4%yoy in 1Q2015 and forecast to reaccelerate to ~+2.75%yoy by the end of 2016. Mechanically, a fair portion of this reacceleration is just the earlier large fall in fuel prices starting to drop out of the annual growth calculation, but there is also a degree of increased import price “pass-through” more generally as the NZD has fallen. Replicating our earlier Australian analysis for New Zealand, we estimate an 15bp increase in tradables inflation (and 11bp increase in overall inflation) for each one percentage point increase in import prices. This sensitivity appears broadly consistent with that understood by the RBNZ.”
Key Quotes
“Reflecting this, our forecasts do not see inflation returning to +2.0%yoy until around mid-2018, as a mix of sub-trend growth and gently rising unemployment weigh increasingly on the non-tradable components of the inflation basket. Specifically, non-tradables inflation is expected to sequentially ease through 2016 to ~+1.1%yoy, and to recover only gradually to an ~1.75% average rate in 2017 and 2018. In context, this is materially below its long run average (+3.6% since 1989).”
“Our forecasts do however reflect offsetting price reflation on the tradables side, with annual growth having likely bottomed at ~-2.4%yoy in 1Q2015 and forecast to reaccelerate to ~+2.75%yoy by the end of 2016. Mechanically, a fair portion of this reacceleration is just the earlier large fall in fuel prices starting to drop out of the annual growth calculation, but there is also a degree of increased import price “pass-through” more generally as the NZD has fallen. Replicating our earlier Australian analysis for New Zealand, we estimate an 15bp increase in tradables inflation (and 11bp increase in overall inflation) for each one percentage point increase in import prices. This sensitivity appears broadly consistent with that understood by the RBNZ.”