Inflation 1% - and it could slide further

By Brian Fallow

A 4.5 per cent rise in power prices during the June quarter was not enough to push the consumers price index above 0.3 per cent. Photo / Mark Mitchell
A 4.5 per cent rise in power prices during the June quarter was not enough to push the consumers price index above 0.3 per cent. Photo / Mark Mitchell

Annual inflation is 1 per cent, the lowest for 12 and a half years, after consumer prices rose just 0.3 per cent in the June quarter.

The markets and the Reserve Bank had expected 0.5 per cent.

A 4.5 per cent jump in power prices, reflecting higher line charges to fund upgrades to the national grid, explained more than half the quarterly increase.

Rents rose 0.5 per cent, driven by Auckland, but that is softer than the 0.9 per cent rise recorded in the March quarter. Over the year rents have risen 2.3 per cent.

Construction costs are accelerating - 0.9 per cent in the June quarter, following 0.7 per cent in March and 0.4 per cent in December.

Westpac economist Michael Gordon said housing-related inflation had picked up over the past 18 months as the housing market turned higher and post-earthquake rebuilding in Christchurch progressed.

"But the date at which this starts to spill over into more generalised inflation seems more distant after [yesterday's] figures.

That could in turn mean further delays to interest rate hikes," he said.

Inflation in tradables sectors, where goods and services are imported or compete with imports, was just 0.1 per cent in the quarter, reflecting a combination of a high New Zealand dollar and soft demand.

Household appliances fell 0.7 per cent, audio-visual equipment 3.1 per cent, new car prices 0.7 per cent and used cars 1 per cent.

Petrol prices rose 0.4 per cent in the quarter to be 0.2 per cent higher than their previous peak a year ago.

Over the year tradables prices fell 1.1 per cent, the biggest fall since March 2004.

Non-tradables inflation was 0.5 per cent for the quarter and 2.4 per cent for the year, the lowest annual rate for two years.

Deutsche Bank chief economist Darren Gibbs said that as far as the Reserve Bank was concerned the June quarter's benign inflation report provided a counter to the surprisingly strong March quarter gross domestic product - a 1.1 per cent increase for the three months - reported late last month.

Gibbs expects annual inflation to dip below the 1 per cent bottom of the Reserve Bank's target band in the current quarter.

"We continue to think an official cash rate cut triggered by developments offshore will remain more likely than a domestically driven OCR hike for at least the balance of the year."

Measures of core or underlying inflation put the annual rate somewhere in the 1.1 to 1.8 per cent range.

ASB economist Christina Leung said that "for now" the Reserve Bank would be very comfortable with the inflation environment. "Pricing intentions and inflation expectations are continuing to ease and annual inflation is now at the bottom of the bank's target band."

But BNZ economist Craig Ebert said the Reserve Bank should not, and probably would not, relax on the inflation front.

ANZ economist Mark Smith said uncertainty surrounded the impact and timing of the Canterbury rebuild, the New Zealand dollar was still high and the global environment was fragile.

In such an environment the large degree of inflation headroom the June quarter numbers confirmed gave the Reserve Bank the luxury of waiting before starting to withdraw monetary stimulus.

"The next move in the OCR will be up, although hikes are so far off there seems little point [trying to estimate the timing]," Smith said.

- NZ Herald

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