Consumer price inflation increased by 5.0% year-on-year as at the end of October 2021, which was unchanged from the previous month. Inflation now averages 4.3% for the first 10 months of 2021 compares to the 3.3% average in 2020. Month-on-month inflation saw a modest 0.2% increase which also matched the month-on-month increase for September.
For the second consecutive month all 11 inflation categories saw price increases over the last year, with transport (1.5%), food and non-alcoholic beverages (1.1%) and housing and utilities (1.0%), being the largest contributors to year-on-year inflation. Further analysis of the sub-category increases revealed that fuel for transport (23.1%) and electricity and other fuels (14.0%), saw notably large price increases which may affect secondary inflation measures going forward.
Even though inflation remains within the official 3% to 6% target band the implied intention of the Reserve Bank governor is to maintain inflation at the midpoint of this band. Considering this and the recent high inflation print from the US, it will not be a major surprise if interest rates are raised at the next Monetary Policy Committee meeting. Increasing inflation and increasing interest rates are generally not positive for nominal bonds. However, the steepness of the yield curve still affords the opportunity for PPS funds to remain overweight domestic bonds, with a mix of both nominal and inflation-linked bonds.
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