ASB: CPI Nudging 7%

ASB note that “Q1 consumer prices surprised to downside, but this still pushed annual CPI inflation to its highest in more than 30 years. The downward surprise to our expectations was a less rapid than expected lift in tradable prices, but this is likely to reverse in the coming quarters. Large cuts to domestic airfares explained the downward surprise to our expectations of non-tradable inflation, and this should reverse in the coming quarters as NZ opens up. Furthermore, annual tradable and non-tradable inflation both hit multi-decade highs and core inflation measures firmed on an annual basis. These developments illustrate the broad-based nature of price rises and are reflective of a number of domestic and external sources. It is still comparatively early days, but elevated headline inflation and the multi-faceted sources of price increases continue to highlight the risk of high inflation outcomes proving to be persistent. We expect annual CPI inflation to remain well above 5% over all of 2022 and it may not be until 2024 that inflation falls below 3%. Given that the RBNZ’s inflation mandate now looks to be under increasing threat, we expect the RBNZ to continue to move swiftly on OCR settings with a 50bp hike in May (to 2%). The degree of hikes delivered beyond that will depend on the outlook for inflation and inflation expectations, and how the NZ economy responds to tighter financial conditions. We have penciled in an OCR peak of 3.25% in early 2023 but expect OCR cuts some time beyond that as the economy cools, but only once the RBNZ is confident that inflation is under control.”