Inflation lower than expected

By Brian Fallow

Photo / Paul Estcourt
Photo / Paul Estcourt

Inflation was benign in the year's first three months - at least for carless non-smokers with a dainty appetite.

The consumer price index rose 0.8 per cent - less than the 1 per cent the market had expected.

But coming on top of the GST rise in October it pushed the annual inflation rate to 4.5 per cent, its highest since September 2008.

Higher prices for petrol (up 9.7 per cent in the quarter) and diesel (up 15.7 per cent) accounted for most of the increase, 0.5 percentage points.

An increase of 11.6 per cent in the tax on tobacco, the second in a planned series of three, accounted for a further 0.2 percentage points, as did a 1.2 per cent rise in food prices.

Those rises were as expected. The surprise in the data was the general weakness of tradeable inflation, which reflects prices influenced by international prices and the exchange rate.

Statistics New Zealand said if petrol and diesel had remained unchanged through the quarter, tradeables prices (which represent about half the CPI) would have fallen 0.6 per cent.

"The appreciation in the New Zealand dollar late last year would have given retailers scope for further discounting," said ASB economist Christina Leung.

"However, the 0.9 per cent decline in tradeable inflation excluding the fuel component is even lower than what the high level of the dollar would have suggested."

ANZ economist Mark Smith said although some of the decline in tradeables prices was seasonal - such as international air fares - the main driver was discounting by retailers and a general lack of pricing power.

Clothing, furniture and domestic appliances were among the prices to fall. In all, 254 of the 694 items in the CPI fell in price, while a further 100 were unchanged.

"For the moment the difficult retail environment is limiting the pass-through of higher costs at the retail level," Smith said. "This is welcome but it cannot continue indefinitely."

The inflation outlook was looking troublesome, he said.

"Higher petrol prices look set to add at least an additional 0.4 per cent to inflation in the June quarter and possibly more."

Increases to electricity and some prices had already been announced. In addition there would be earthquake-related pressures on rents, insurance and further out on construction costs.

The dollar fell about half a cent against the US dollar on the lower-than-expected out-turn, and short-term wholesale interest rates eased. "The view is that it has bought the Reserve Bank some time," Smith said.

Leung said the bank would be very comfortable with the result which was close to its forecast of 0.7 per cent.

"Weak domestic demand and the high dollar is keeping the price of imported consumer goods low. Added to that, inflation indicators point to inflation pressures being contained for now," she said. "However, we expect inflation pressures to re-emerge next year as the recovery in the economy picks up pace."

A Reuters survey last week found that most forecasters expect it to be the new year before the bank raises the official cash rate from 2.5 per cent.

- NZ Herald

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