Strong NZ Domestic Inflation May Also Show In Australia’s Q1 Data

There is a high correlation between Australian and NZ annual CPI inflation across the major components. The NZ Q1 data showed headline inflation moving closer to the top of the band in line with expectations at 4.0% y/y. But most commentators, including MNI, were concerned with the strength and stickiness of the domestically-driven non-tradeables component which rose 5.8% y/y. There is a risk that this will be repeated when the Australian data is released on April 24.

• The RBA said that most of the benefit from lower goods prices in bringing inflation down is behind us and so it requires lower services inflation to return CPI to target. The NZ data showed that it is still goods prices reducing overall inflation.
• In Q4, the 3-year rolling correlation between Australian and NZ headline CPI was 90%. Given this, helpful base effects and the 3.4% January/February average, a similar moderation in Australian Q1 CPI is possible.
• The RBNZ’s Q1 measure of underlying inflation eased 0.4pp to 4.3% y/y and given the correlation with Australia is above 95%, core is also likely to ease considerably in Australia. The monthly data is consistent with this too.
• In NZ, the area of concern is domestic inflation and the RBA is also focused on sticky services prices. With NZ non-tradeables moderating only 0.1pp in Q1 and still elevated and services rising 5.3% y/y, there is a risk that there will be little improvement in Australia’s services CPI which printed at 4.6% y/y in Q4 and has a correlation with NZ of over 80%. Non-tradeables have a correlation of close to 90%.