Big rate cut due as inflation drops to 3.4pc

Plunging fuel prices mean inflation has fallen dramatically. Photo/Getty

A big interest rate cut next week is now all but certain, as the latest Consumer Price Index confirms a big slump in inflation.

Annual inflation fell to 3.4 per cent in the December quarter, from the 18-year high of 5.1 per cent in the three months to September.

For just the December quarter, the Consumers Price Index (CPI) fell 0.5 per cent, Statistics New Zealand said this morning.

Transport prices fell 7.6 per cent in the quarter, while food prices were up 1.5 per cent. The rise in food prices was caused by more expensive meat, poultry and fish.

The 22.4 per cent fall in petrol prices in the December quarter was the largest single factor in the CPI decrease. Had petrol and diesel prices remained unchanged from the September quarter, the CPI would have increased 0.9 per cent, SNZ said.

Pump prices for petrol and for diesel, which was down 26.9 per cent in the quarter, had peaked in early July and fell steadily during the following months.

In the final week of December, prices had fallen to about 12 per cent below the overall average for the December quarter, SNZ said.

Global oil prices have fallen steeply from their peak last July. By the end of last year petrol prices at the New Zealand pump had dropped 86c or 40 per cent from their July peak.

Electricity prices rose 2 per cent in the quarter, while actual rentals for housing were up 0.4 per cent and have increased every quarter since June 2001.

Housing and household utilities prices rose 0.6 per cent, driven by steeper power bills. "Recreation and culture" prices were up 1.5 per cent, driven by higher prices for overseas package holidays.

This morning's inflation numbers mean the way is now clear for the Reserve Bank to make another big cut in the Official Cash Rate next week.

ASB chief economist Nick Tuffley said the inflation figures were "on the tame side of expectations".

" Underlying pressures appear slow to abate at this stage. Nevertheless, we expect that resource pressures will abate more noticeably over the next couple of years."

This morning's result, along with the outlook, left the Reserve Bank with " plenty of scope to cut the OCR by 100bp (one percentage point) on January 29."

UBZ NZ economist Robin Clements said he doubted today's inflation number would make much difference for the Reserve Bank.