Brian Fallow

The Economics Editor of the NZ Herald

Puff goes out of inflation

Weak rise in CPI drops annual rate below the Reserve Bank's target band to 0.8 per cent

The New Zealand dollar fell, closing at US81.57c, down from US81.82c. Photo / APN
The New Zealand dollar fell, closing at US81.57c, down from US81.82c. Photo / APN

The annual inflation rate has fallen to 0.8 per cent, as the high dollar depresses prices for imports and exportable goods.

The consumers price index (CPI) rose a weaker-than-expected 0.3 per cent in the September quarter, pulling the annual inflation rate to its lowest since December 1999.

It's the first breach of the lower boundary of the Reserve Bank's 1 to 3 per cent target band since it was reset 10 years ago.

It immediately prompted calls from the Employers and Manufacturers Association and the Green Party for new Governor Graeme Wheeler to cut the official cash rate when he reviews it next week.

The swaps market had already fully priced in a cut of 25 basis points by June next year; yesterday's data pulled wholesale interest rates lower - by seven basis points one and two years out.

The New Zealand dollar also fell, closing at US81.57c, down from US81.82c at 8am.

ANZ economist Mark Smith said that while a benign starting point for headline inflation was helpful, it was future inflation that mattered to the Reserve Bank and the hurdle for an OCR cut was high. ANZ's most likely scenario was the OCR remaining on hold to 2014.

Deutsche Bank chief economist Darren Gibbs expects the CPI to rise just 0.2 per cent in the December quarter but says with last December's 0.3 per cent fall dropping out of the latest year and into the previous one, the annual rate would be pushed up to 1.4 per cent - back inside the Reserve Bank's target range.

"We think the lower starting point for inflation opens the door a little wider to a potential policy easing late this year or early next year, if there are any additional disinflationary pressures stemming from external developments or further signs domestic economic recovery is likely to disappoint," Gibbs said. "Tightening remains a distant prospect."

But Westpac economist Michael Gordon pointed to signs housing-related inflation was accelerating. Nationwide, the cost of building a new house rose 1 per cent in the quarter and 3 per cent for the year. In Canterbury, the rises were 3.4 per cent and 9.6 per cent respectively.

"Our concern is the Canterbury rebuild will boost housing-related inflation, eventually forcing the Reserve Bank to increase the OCR. This story still looks very much on track."

Tradeables inflation, which reflects the 44 per cent of the consumers price index where prices are driven by world prices and the exchange rate, was nil in the latest quarter. Tradeables prices fell 1.2 per cent over the year.

Domestic or non-tradeables inflation was 0.5 per cent in the quarter, 2.3 per cent for the year. That included a 3.6 per cent rise in council rates, a 0.6 per cent rise in rents (0.8 per cent in Auckland), and 17 per cent rise in home insurance premiums.

Food rose 1.1 per cent in the quarter, after a 20 per cent jump in vegetables, dairy prices fell and meat was flat. Used cars fell 2.8 per cent, audiovisual equipment 4.8 per cent and domestic airfares 7.8 per cent.

One measure of core inflation, the trimmed mean, which disregards the 10 per cent largest price rises and falls and looks at the broad mass of prices in between, was 0.1 per cent in the quarter and 1.1 per cent for the year.

The Reserve Bank's own measure of core inflation was 1.4 per cent. Its forecasts last month have inflation back around 2 per cent by the end of the year and thereabouts through 2013 and 2014.

September truck slows down

The economy trucked along more slowly last month - slowly enough for the ANZ Truckometer to suggest it may struggle to record any growth at all for the September quarter.

ANZ's heavy traffic index, a good real-time indicator of economic activity, fell 5.3 per cent in September, reversing its gains over the two previous months and falling to its lowest level since July last year.

ANZ economist Sharon Zollner said it suggested the relatively strong economic growth in the first half of the year was unlikely to be sustained in the September quarter, and a weaker result was likely.

- NZ Herald

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