Peak Inflation Sightings Are False Dawn As Hawks Circle

There were two ostensible “peak inflation” sightings on Thursday, but I’d be inclined to call them false dawns.

Annual inflation in New Zealand surged 6.9% during the March quarter, the government said, flagging sharp increases in prices for everything from housing to utilities to transportation to groceries.

To be sure, 6.9% was a scorching print. In fact, it was the highest in 32 years (figure below). But economists expected worse. Consensus was looking for 7.1%.

A few tenths of a percent may seem like a trivial distinction. And it is from the perspective of consumers. But not for market participants, who are keen on any evidence to support the “peak inflation” narrative.

Note that the QoQ pace, 1.8%, was also short of estimates (2%) even as it too represented an acceleration from the prior period’s rate.

In recognition of the miss, the kiwi slipped. Last week, RBNZ delivered a super-sized rate hike, the first in decades (figure below). The bank characterized the decision as “the path of least regret.”

RBNZ is especially concerned about the expectations channel, and the potential for a self-fulfilling prophecy. Thursday’s data won’t do much to allay those fears, but it registered with markets. Yields dropped with the currency.

Unfortunately, a separate gauge of core prices compiled by the central bank hit a record in Q1 at 4.2%, data published later Thursday showed (figure below). Q4’s rate was revised markedly higher, to 3.8% from 3.2%.

RBNZ began calculating the measure 29 years ago.

Meanwhile, final data for March out of Europe showed both headline and core inflation were a tick lower than the flash readings, at 7.4% and 2.9% versus 7.5% and 3%, respectively. When the preliminary data was released, on April 1, one analyst despaired that his “wallet shriveled” just from documenting the numbers.

As was the case with New Zealand’s CPI figures, the “relief” implied by the numbers out of Brussels was meaningless from a consumer’s perspective. One Bloomberg blogger was quick to declare it inconsequential from a policy perspective too.

The “small drop in euro-area inflation changes nothing,” Lorcan Roche Kelly wrote, from Dublin, adding that although “the slight revision is good news at the margin, market focus will remain firmly fixed on the prospects for a July ECB hike and the possibility of a positive deposit rate by the end of the year.” The figure (below) is indicative of that.

Multiple ECB officials on Thursday reiterated the message from the April policy meeting — namely that APP will be wound down expeditiously to set the stage for a rate hike as soon as summer.

“I see no reason why we should not discontinue our asset purchases in July,” Luis de Guindos told Bloomberg, in an interview. Although he nodded to the necessity of assessing fresh projections, de Guindos said that from “today’s perspective, July is possible.” Separately, Pierre Wunsch called rate hikes to get the depo rate at least back “up” to zero by year-end “a no brainer.”

All in all, the market will continue to welcome any evidence, no matter how inconsequential, that price pressures may have peaked. But the message from Thursday’s data out of New Zealand and Europe was twofold. First, policymakers are committed to an aggressively hawkish stance and it’s going to take more than incremental improvements in the data to dissuade them. Second, the argument that Q1 2022 wasn’t “peak inflation” is still strong. In New Zealand, the expectations channel is the worry. In Europe, it’s all about the war and a prospective ban on Russian energy.

Indeed, market-based inflation expectations in Europe are now on the brink of exceeding those for the US, in what Bloomberg aptly described as a “once unthinkable” trade in the post-GFC era.