Inflation analysis: Exchange rate and communications prices


24 July 2017

There was a surprise in last week’s 0.0% inflation numbers for the June that no-one picked. The significant reduction in communication prices has continued over the last 12 months, and as the chart below depicts these price decreases appear to be the only factor keeping annual inflation so low. The question going forward has to be for how long can falling household internet and mobile costs continue? I have always said that fierce competition in the economy is the best way to maintain low inflation. However, you do wonder about for how long the squeezed profitability margins at the three mobile service providers can go on for. We will see if the RBNZ address this sort of inflation analysis in their 10 August statement. 

The financial markets will be looking closely at the RBNZ’s update inflation forecasts in the 10 August Monetary Policy Statement. The NZ dollar exchange rate has traded substantially above their assumed level for this time, therefore they must be forced to reduce their March 2018 inflation forecast to below 1.00%. It takes nine months for higher exchange rate movements to feeds through to lower imported goods prices. The RBNZ will not be too happy that miss-placed statements about interest rates by their mates over at the RBA over recent weeks has sent both the Aussie and Kiwi dollar’s higher against the USD. 

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