What can we learn from NZ CPI?

Around this time of each quarter, I keenly anticipate the release of the NZ CPI data. Over time, experience has shown that it’s a reasonable guide to Australia CPI. As best as I can tell, the Q1 NZ CPI data suggests another quarter of low inflation, at around the level of the prior quarter.

NZ_AUCPI_qq

The fact that NZ and Australian CPI are so correlated ought to make intuitive sense — Australia and NZ are both small open economies, which are price takers on the tradable goods markets.

Thus, one finds strong correlation between the tradable goods CPIs — even on a QoQ basis. If you want to get fancy you can adjust for movements in FX — however AUDNZD doesn’t move all that much, so the simple comparison has most of the information.

NZ_AU_tradableCPI_qq

There are some reasons why you might think that the non-tradable numbers should be somewhat correlated — similar shocks hit both economies, Australian shocks hit NZ as Australia is NZ’s largest trading partner, and the labour market between the two nations is relatively open for migration flows — however it’s not much help quarter to quarter. Surely, there’s a limit to how far the two can drift apart (though the real AUDNZD rate is probably more important for NZ than AUD) — but it’s not all that much use for non-tradable inflation.

NZ_AU_nonTradCPI_qq

Over recent years, the (non) relationship between non-tradable CPIs has looked a bit worse than it should have as NZ and Australia have introduced policy measures which boost non-tradable inflation.

Still, it’s a good guide. Drawing the two together, it seems likely that overall CPI is likely to be ~0.5%q/q in Australia — both for headline and core measures. Low, but probably not low enough to have the RBA cutting rates in May.

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This entry was posted in AUD, economics, monetary policy, NZD and tagged . Bookmark the permalink.

4 Responses to What can we learn from NZ CPI?

  1. ssec says:

    Index of commodity prices in AUD terms is falling fast, as is the ToT. More rate cuts are getting more and more probable, but not in May, unless we get a very low inflation number next week.

  2. Pingback: Guessing at Q1’13 CPI | ricardian ambivalence

  3. Time for another one of these using Q2 NZ CPI? And being fancy and accounting for the fact that AUDNZD was about 2.5% lower in Q2 vs. Q1?

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