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New Zealand’s Q3 CPI inflation slows to 3.7% YoY, below the 3.8% forecast
New Zealand's third-quarter Consumer Price Index (CPI) fell a tenth of a percentage point short of forecasts on both the quarterly and annual measures, pulling the Kiwi back from a four-week high. On the release bar, NZD/USD slipped from just above 0.5700 to just below that threshold, returning to where it had traded before breaking above the level earlier in the session.
Against expectations of a 0.8% quarterly increase, prices rose 0.7%, while annual inflation slowed from 4.1% to 3.7%, below the 3.8% forecast. In September, the Reserve Bank of New Zealand (RBNZ) had projected 3.9%. That projection had led the Kiwi's five-session advance to price in a rate rise on 28 October, an expectation now undermined by the release.
With non-tradable prices increasing 1.0% over the quarter and 3.3% over the year, the weakness was concentrated in tradable prices, which include petrol and diesel. According to Westpac, fuel subtracted about 0.4 percentage points from the quarterly rate. The only bank in the survey to predict 3.7%, Westpac had described the expected dip as a temporary reprieve ahead of the release.
NZD/USD gives back part of its recent advance
About a tenth of the five-session advance from the 14 October low, just above 0.5550, has been erased following the release. Before the data, that rally had stalled below the 50-day Exponential Moving Average (EMA), which sits just above 0.5700. NZD/USD has remained beneath that average since early September, and daily momentum was approaching overbought territory ahead of the figures.
5-minute chart for NZD/USD
Inflation explained
The increase in the price of a representative basket of goods and services is measured by inflation. Headline inflation is generally reported as a percentage change month-on-month (MoM) and year-on-year (YoY). More volatile components, including food and fuel, are excluded from core inflation because their prices can fluctuate in response to geopolitical and seasonal factors. Economists concentrate on this core measure, which is also targeted by central banks. Their mandate is to maintain inflation at a manageable level, typically around 2%.
Changes in the prices of a basket of goods and services over time are tracked by the Consumer Price Index (CPI). The measure is generally reported as a percentage change month-on-month (MoM) and year-on-year (YoY). Central banks target Core CPI, which strips out volatile food and fuel components. A rise in Core CPI above 2% usually leads to higher interest rates, while a decline below 2% tends to produce the reverse. Higher interest rates support a currency, so rising inflation generally strengthens it; falling inflation has the opposite effect.
A country's currency tends to appreciate when inflation is high and weaken when inflation is low, however counter-intuitive that may appear. To tackle higher inflation, the central bank will normally increase interest rates. Those higher rates draw in more global capital from investors seeking an attractive return on their money.
Investors once sought out Gold during periods of high inflation because it retained its value. They still often buy Gold for its safe-haven qualities during extreme market turmoil, but this is not usually the case otherwise: high inflation prompts central banks to raise interest rates to contain it. For Gold, higher interest rates are a headwind. They raise the opportunity cost of holding the metal rather than an interest-bearing asset or money in a cash deposit account. Lower inflation, by contrast, tends to support Gold by bringing interest rates down and making the precious metal a more viable investment alternative.
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