New Zealand's CPI inflation eases to 3.7% YoY in Q3, vs 3.8% expected

New Zealand's third-quarter Consumer Price Index (CPI) came in a tenth under forecast on both the quarterly and the annual measure, and it took the Kiwi off its four-week high. NZD/USD fell from just above 0.5700 to just under it on the release bar, back where it traded before climbing through that level earlier in the session.

Prices rose 0.7% on the quarter against a 0.8% forecast, and the annual rate eased to 3.7% from 4.1% against 3.8% expected. The Reserve Bank of New Zealand (RBNZ) had projected 3.9% in September. The Kiwi's five-session climb had priced an October 28 hike on that projection, and the release has undercut it.

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Non-tradable prices rose 1.0% on the quarter and 3.3% on the year, so the softness sat in tradable prices, where petrol and diesel are counted. Westpac put fuel's drag on the quarterly rate at about 0.4 points. Westpac was the one bank in the survey to forecast 3.7%, and it called the dip a temporary reprieve before the number came out.

Market reaction

The release has taken back about a tenth of the five-session climb from the October 14 low just above 0.5550. That climb stopped short of the 50-day Exponential Moving Average (EMA), just above 0.5700, which NZD/USD has traded under since early September. Daily momentum was close to overbought going into the release.

NZD/USD 5-minute chart

Inflation FAQs

What is inflation?

Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.

What is the Consumer Price Index (CPI)?

The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.

What is the impact of inflation on foreign exchange?

Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.

How does inflation influence the price of Gold?

Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it. Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.