Below the 3.8% forecast: New Zealand’s Q3 CPI inflation slows to 3.7% YoY

The Kiwi retreated from a four-week high after New Zealand's third-quarter Consumer Price Index (CPI) undershot forecasts by a tenth of a percentage point on both the quarterly and annual readings. On the release candle, NZD/USD slipped from marginally above 0.5700 to just below that mark, returning to where it had traded before breaking above the level earlier in the session.

Against expectations of 0.8%, prices increased 0.7% over the quarter. Annual inflation slowed from 4.1% to 3.7%, below the 3.8% forecast and the 3.9% projection made by the Reserve Bank of New Zealand (RBNZ) in September. During its five-session advance, the Kiwi had priced in an October 28 rate hike on the basis of that projection; the latest figures have weakened that case.

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With non-tradable prices increasing 1.0% quarter-on-quarter and 3.3% year-on-year, the weakness was concentrated in tradable prices, which include petrol and diesel. According to Westpac, fuel reduced the quarterly inflation rate by about 0.4 percentage points. The only bank in the survey to predict 3.7%, Westpac had described the decline as a temporary reprieve ahead of the release.

How Has NZD/USD Responded?

About a tenth of the five-session advance from the October 14 low, just above 0.5550, has been erased following the data. The rally had stalled before reaching the 50-day Exponential Moving Average (EMA), which sits just above 0.5700. NZD/USD has remained below that average since early September, while daily momentum was nearing overbought territory ahead of the release.

NZD/USD: 5-minute price chart

Inflation: Common Questions

How is inflation defined?

A rise in the prices of a representative basket of goods and services is measured as inflation. The headline measure 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 developments and seasonal factors. Economists concentrate on this core reading, which is also the measure targeted by central banks. Their mandate is to maintain inflation at a manageable rate, generally around 2%.

What does the Consumer Price Index (CPI) measure?

Changes in the prices of a basket of goods and services over time are tracked by the Consumer Price Index (CPI). The index is generally reported in terms of percentage changes month-on-month (MoM) and year-on-year (YoY). Central banks target Core CPI because it leaves out volatile food and fuel components. A Core CPI reading above 2% typically leads to higher interest rates, while a reading below 2% generally has the reverse effect. As higher rates support a currency, rising inflation usually strengthens it; falling inflation tends to have the opposite effect.

How does inflation affect currency markets?

A country's currency tends to gain value when inflation is high and lose value when inflation is low, even though this may appear counter-intuitive. The reason lies in the central bank's usual response: raising interest rates to tackle elevated inflation. Those higher rates draw in more global capital from investors seeking attractive returns on their funds.

What does inflation mean for Gold prices?

Investors historically sought Gold during periods of high inflation for its ability to retain value. They still frequently buy Gold as a safe haven during severe market turmoil, but this pattern does not hold most of the time. Elevated inflation prompts central banks to raise interest rates to bring it under control. For Gold, higher rates are unfavourable: they raise the opportunity cost of holding the metal rather than an interest-bearing asset or money in a cash deposit account. Conversely, lower inflation generally supports Gold by bringing interest rates down and making the precious metal a more attractive investment alternative.