NZ dollar drops as inflation slides

Photo / The Listener

New Zealand's consumer prices unexpectedly fell in the final three months of last year due to cheaper vegetables, taming the pace of annual inflation.

The New Zealand dollar immediately fell against the benchmark US dollar, from US80.71 cents before the announcement at 10.45 am to US80.32 cents just before 11 am.

The consumer's price index fell 0.3 per cent in the three months ended December 31, taking the annual pace to 1.8 per cent, according to Statistics New Zealand.

That was well below the 0.4 per cent rise expected in a Reuters survey of economists, who were picking the annual pace of inflation to be 2.6 per cent. The CPI rose 0.4 per cent in the September quarter.

The decline was led by a 2.2 per cent fall in food prices, with the price of vegetables dropping 25 per cent in the quarter, while cheaper telecommunication services and household items such as kitchenware, furniture and appliances added to the fall.

If vegetables hadn't been so cheap, the CPI would have increased 0.1 per cent.

"The larger-than -usual fall for vegetables reflects a supply shortage in the three months to September," Statistics NZ prices manager Chris Pike said in a statement.

"Vegetables were higher than normal last winter, then fell to normal levels towards the end of the year."

The tepid pace of annual inflation ensures the Reserve Bank won't have to worry about domestic price pressures, and can focus on global shocks emanating from the sovereign debt crisis of the European Union.

RBNZ Governor Alan Bollard will review monetary policy next week, and isn't expected to lift the official cash rate from its record-low 2.5 per cent until the tail-end of this year.

The tradable component of the CPI fell 0.9 percent, its biggest fall since December 2008, while non-tradable CPI rose 0.2 percent in the quarter. The tradable component covers items that are open to foreign competition, while non-tradable items do not.

Rising transport prices offset the quarterly fall, with a 5.8 per cent increase in international air travel from rising fares in Asia and Europe, and a 0.9 per cent rise in petrol prices.

Transport group prices rose 5.7 percent in the calendar year, with an 11 per cent increase in petrol prices.

Today's figures are the first to exclude the impact of the October 2010 increase in GST, which lifted the headline inflation figure by about 2 per centage points, and was offset by income tax cuts.

Telecommunication services prices fell 3.6 percent in the quarter due to cheaper internet charges from higher data caps, lower broadband prices, and cheaper international calling rates, and were down 8.6 per cent over the year.

The price of telecommunication equipment continued to fall, down 8.4 per cent in the quarter for an annual decline of 26 percent. Audio-visual and computing equipment prices fell 3.4 per cent for an annual drop of 13 per cent.

Retailers have been heavily discounting stock over the past couple of years as tepid consumer demand has forced them to drop their prices and squeeze profit margins.

The data captured rising insurance costs in the wake of the Canterbury earthquakes, with a 0.7 per cent rise in December following a 2.4 per cent increase in September. Dwelling insurance rose 2.9 per cent in the December quarter, while contents insurance rose 0.8 per cent. The annual price of insurance was up 4.5 per cent in the year.