Why is Australian inflation much higher than NZ?

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Given the boom in NZ versus the grinding slump in Australia, it’s a great question posed today by UBS:

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This week saw the release of Q1 inflation data for both Australia & NZ. As has been the case since 2012, inflation in NZ continues to be well below that for Australia, at 0.1% y/y in Q115, compared with Australia’s 1.3% y/y. For underlying measures, a similar gap persists, with some NZ measures below 1% y/y, but Australia’s around 2¼% y/y.

While Australasian inflation rates have been typically close prior to 2012, the past few years of divergence are even more stark given the relative out-performance of the NZ economy. Over the past year, NZ’s GDP and jobs growth has been much faster than Australia’s, while their unemployment rate has been lower. NZ’s terms of trade has also fallen by less than half as fast as Australia’s has over the past year.

We find that over the past 3 years, there’s not a single CPI sub-sector for Australia that has lower average inflation than NZ. Those sectors where inflation in NZ is materially below Australia’s are communications, health, household furniture & services and rec & culture (each with 2-5% y/y slower inflation rates), followed by education, transport, alcohol & tobacco and food (with 1-2% y/y slower rates). The areas most similar are housing, clothing and insurance & financial services (where the CPI gap is <1%).

While a ‘deeper dive’ is warranted to explain this Australasian growth/CPI divergence, Australia’s higher CPI appears initially driven by faster non-tradable inflation during 2012 to mid-13, subsequently sustained until now by much less marked disinflation from imported goods prices. While a stronger NZD is likely a key contributor, it also appears NZ’s traded goods sector has been more competitive, even relative to the NZD.

In short, Australia is an over-consolidated haven for vested interests.

About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.