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NZ CPI inflation struck 1.4% in December 2020 quarter compared to the same quarter in 2019, as per Stats NZ figures, released on 22 January.
Economists had anticipated inflation to slide to 1.1%. In the December 2020 quarter, CPI increased 0.5% compared to the September quarter of 2020, led by higher prices for accommodation, housing, and cars.
The CPI gauges the rate of price change of goods and services bought by New Zealand households.
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Significantly less international travel in December 2020 due to COVID-19 resulted in increased demand and price pressures for certain goods.
Major drivers behind the quarterly rise in CPI
The quarterly rise in CPI was driven by an increase in prices for domestic accommodation, which witnessed a gain of 20% in the December quarter 2020 compared to 11% rise in the same quarter in 2019.
Lower price levels for domestic accommodation were reported in the June and September 2020 quarters, which corresponded to a drive to improve domestic tourism after COVID-19 lockdown.
Some of the highlights of the groups that added to the quarterly rise of CPI for the December quarter 2020 included the following:
- Transport rose 2.3%, prompted by higher prices for purchase of vehicles (+3%) and passenger transport services (+7.9%).
- Recreation and culture increased 2.6%, affected by higher prices for accommodation services (+11%), with reports of rise in labour costs and increase in prices for some materials and components.
- Housing and household utilities soared 0.5%, swayed by higher prices for purchase of housing (+1.3%).
- Food dropped 1.7% due to lower prices for fruit and vegetables (-12%).
Further, the implementation of quarantine-free travel to Australia, which witnessed increased prices for the Auckland to Sydney route, also pushed prices. The route contributed for about 0.1% of the 0.5% rise in CPI.
DO READ: Travellers arriving to New Zealand to undergo pre-departure testing
Inflation expected to be stable in the long-term
Market expectation on getting burdened with higher inflation are diminishing now. Further, economists are now changing their calls on OCR going negative or falling below 0.
Mark Smith, ASB Senior Economist, stated that NZ economy had been more buoyant than expected while the housing market was thriving. He expected annual headline inflation to dip at the start of this year but to gradually stay firm afterwards, with more upside risk now adding to the inflation outlook.
He also added that the reduced risk of deflation indicated that the OCR was not likely to move lower from its current record low of 0.25%. However, RBNZ is likely to keep highly stimulatory settings until it gets certainty that economic activity and the labour market have picked up. This could imply bearing with higher inflation.
Liz Kendall, ANZ Senior Economist, expects cost pressures from supply disruptions to lift inflation in the future. A temporary rise in inflation to above 2% was likely in mid-2021, followed by a retraction in 2022.
