JP Morgan has some advice for anyone using New Zealand's inflation report to speculate on Australia's: Don't

  • Australia’s June quarter consumer price inflation (CPI) report will be released next week.
  • New Zealand released its CPI report earlier today, revealing headline and core inflation both ticked higher in the year to June.
  • JP Morgan outlines why you shouldn’t extrapolate what’s happened in New Zealand to what may be seen in Australia.

Australia’s June quarter consumer price inflation (CPI) report will be released next week, an event that’s sure to attract plenty of attention both in Australia and abroad.

It is, after all, perhaps the most important data release when it comes to the outlook for official interest rate settings from the Reserve Bank of Australia (RBA).

One only has to look to past movements in the cash rate — often occurring in the month after the CPI report has been released — to see how influential it is.

Given New Zealand, like Australia, is a small trade-exposed nation with a floating exchange rate, many look to New Zealand’s CPI report — released earlier than Australia — for clues as to what may been seen across the ditch.

In the June quarter, headline CPI in New Zealand increased by 0.4%, leaving the annual rate at 1.5%, the midpoint of the Reserve Bank of New Zealand’s (RBNZ) 1-3% target.

Non-tradeable inflation, measuring price movements determined largely by domestic forces, picked up during the quarter, similar to movements in non-tradable prices in Australia in the year to March this year.

The RBNZ’s core inflation measure also ticked higher, increasing by 1.7% from a year earlier, the fastest increase since 2011.

Given the similarities between the two nations, it suggests similar outcomes could be seen in Australia.

However, before you start extrapolating what’s happened in New Zealand to what may be seen in Australia, Tom Kennedy, Economist at JP Morgan, has some sage advice.


“Forecasting short-run Australian inflation based on comparable headline, tradables and/or non-tradables inflation in New Zealand is fraught with issues and, in general, most associations between the two are red herrings,” he says.

“At the sector level we find only three components where the correlation can be deemed robust, though even here the relationship is not perfect and short-term volatility is common.”

This table shows the correlation between CPI groups in New Zealand’s and Australia’s CPI reports going back to 2010.

JP Morgan

There’s not a lot of significant positive or negative correlations between the groupings, underscoring the need for caution.

“After controlling for factors like oil prices and seasonality directly, there is little additional information in the New Zealand CPI data,” Kennedy says.

“The correlation between the respective tradable baskets (+0.5) is a little stronger than that of non-tradables (+0.4), though even here divergences between the series are common.”

As such, despite an acceleration in headline CPI in New Zealand last quarter, Kennedy is not expecting the same outcome in Australia.

“We maintain our forecast for Australian Q2 CPI to print at 0.4%, which leaves the annual rate unchanged at 1.9%.”

Australia’s Q2 CPI report will be released on Wednesday, July 25.

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