3.7% YoY: New Zealand Q3 CPI Inflation Slows, Below 3.8% Expected

NZD/USD slipped back below 0.5700. New Zealand's third-quarter Consumer Price Index (CPI) undershot forecasts by a tenth on both the quarterly and annual readings, knocking the Kiwi off its four-week high. On the release bar, the pair moved from just above 0.5700 to just below it, returning to where it had traded before breaking through that level earlier in the session.

Annual inflation slowed from 4.1% to 3.7%, below the 3.8% forecast. Quarterly prices increased 0.7%, against expectations of 0.8%. In September, the Reserve Bank of New Zealand (RBNZ) had forecast 3.9%. Based on that projection, the Kiwi's five-session advance had priced in a rate increase on 28 October. The latest figures have weakened that case.

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Tradable prices, which include petrol and diesel, accounted for the weakness. Non-tradable prices increased 1.0% quarter on quarter and 3.3% year on year. Westpac estimated that fuel subtracted about 0.4 points from the quarterly rate. The only bank in the survey to predict 3.7%, Westpac had described the decline as a temporary reprieve before the figures were published.

NZD/USD gives back a tenth of its five-session gain

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, daily momentum had approached overbought territory. The rally had stalled below the 50-day Exponential Moving Average (EMA), which sits just above 0.5700. NZD/USD has remained below that average since early September.

5-minute chart: NZD/USD

Inflation: key questions answered

How is inflation defined?

A rise in the cost of a representative basket of goods and services is measured as inflation. The headline rate is generally reported as a percentage change month on month (MoM) and year on year (YoY). By excluding more volatile components, including food and fuel, core inflation removes items whose prices can swing with geopolitical and seasonal factors. Economists focus on this core measure. It is also the rate targeted by central banks, whose mandate is to maintain manageable inflation, typically around 2%.

What does the Consumer Price Index (CPI) measure?

Changes in the cost of a basket of goods and services over a given period 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 because volatile food and fuel components are excluded. A Core CPI reading above 2% usually leads to higher interest rates; a reading below 2% usually has the reverse effect. Higher rates support a currency, so rising inflation typically strengthens it. Falling inflation generally has the opposite effect.

How does inflation affect exchange rates?

Higher inflation tends to lift a country's currency, while lower inflation tends to weaken it, despite this relationship seeming counter-intuitive. The reason is the central bank's usual response: raising interest rates to curb stronger inflation. Those higher rates draw more capital from global investors seeking attractive returns on their money.

How do inflation and interest rates affect Gold?

Investors historically sought Gold during periods of high inflation for its ability to retain value. They still often buy it as a safe haven during extreme market turmoil, but it is not usually their response to inflation. Central banks generally counter high inflation by raising interest rates. For Gold, higher rates are a negative: 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 metal a more viable investment alternative.