Private property issue #56 - inflation coming down

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Inflation is on its way down. But … the war is not entirely won yet.

New data (released at 11 am this morning) shows the inflation rate fell to 6.7%. That’s down from 7.2% last quarter.

But that’s not the real good news.

The best part is that the inflation number was way lower than the banks and economists predicted.

They all thought inflation would be 6.9% - 7.3%. But the actual number has come in under the forecast.

This matters because it will impact your mortgage interest rate.

What will happen to my mortgage interest rate?

Think back to September last year.

Inflation came out at 7.2%. This was down from the previous quarter. But it was above the Reserve Bank’s expectations. That was the problem.

What happened? Interest rates jumped immediately.

The banks and the financial markets knew what was coming. The Reserve Bank would have to take interest rates even higher.

At the next monetary policy statement, Adrian Orr came out swinging. The Reserve Bank ramped up the OCR, and within 3 months, the 1-year mortgage interest rate jumped by about 1%.

This was all because inflation came in higher than expected.

Today, it’s the other way around. Inflation came in under expectations.

What do you think is going to happen?

Don’t get too excited. Interest rates won’t fall by 1% over the next 3 months.

But this is a positive sign that inflation is on its way down – which gives us more confidence that interest rates will start to head down over the next few years.

The Reserve Bank will now think, “our interest rate rises are working. Maybe we don’t need to raise the OCR much more … maybe we can leave it where it is.”

That ‘change of tune’ will encourage banks and financial markets to soften interest rates, which will help property investors and homeowners.

Where will inflation go next?

While banks and economists got today’s inflation number wrong – they may have correctly picked the trend.

The following graph shows what most of the banks think will happen.

Most are picking that inflation will fall quickly by the end of the year and that we’ll be back within the Reserve Bank’s 1-3% target range by next year.

Today’s figure gives us more hope that these forecasts are possible.

But is it all good news?

It’s important to say that today’s data release isn’t all good news.

Inflation is down. That’s good. But it’s still too high. That’s hurting a lot of Kiwis. They have to spend more at the supermarket and when buying what they need to live.

So the Reserve Bank isn’t going to crank the OCR down any time in the next couple of months.

You also need to ask – is the inflation mainly coming from overseas, or is it coming from here in New Zealand?

Economists call this:

• Tradeable – inflation coming from overseas
• Non-tradeable – inflation caused by what’s happening here at home.

The new data shows that inflation imported from overseas (tradeable) is decreasing. It fell 1.8% to 6.4%, down from 8.2% last quarter.

Domestic inflation (non-tradeable), on the other hand, increased by 0.2%. It went from 6.6% to 6.8%.

This will concern the Reserve Bank because it shows that domestic inflation hasn’t dropped yet.

So while today’s announcement is certainly good news … the trend is in the right direction … the war on inflation is not entirely over. Just yet.