Perhaps some of the best news in the June quarter inflation update was the significant slowing in underlying consumer prices. Several measures of core inflation fell to the mid 3s. Stripping out the more volatile food and energy prices showed inflation lifted just 0.3% over the June quarter, a smaller increase compared to the previous running pace of 0.9%. And with such a slowdown, the annual rate of core inflation eased to 3.4% after being stuck at 4.1% since last December. The RBNZ’s own estimate of core inflation also recorded an encouraging drop to 3.6% from 4.2%.
Underlying price pressures are cooling, quickly. And the extraordinarily weak economic data of late cements the disinflation in core prices - faster than the RBNZ has forecast. The RBNZ’s current growth outlook is proving optimistic. High frequency economic indicators point to a contraction in Q3 economic activity, against the RBNZ’s forecast of 0.3% growth. With that likely comes higher unemployment and a faster easing in price growth than the RBNZ expected in May. Business pricing intentions have also weakened considerably, and slack is growing in the labour market. A slowdown in wage growth is key to quelling still-hot domestic price pressures. Faced with these developments, we are growing in confidence that core inflation will settle within the RBNZ’s 1-3% target rate, sooner rather than later.
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