Jamie Gray

Jamie Gray is a business reporter for the New Zealand Herald and APNZ wire agency

Inflation tipped to slide to lowest in 14 years

'Massive pressures' on the building industry are part of a recipe for higher home-grown inflation, says Westpac Bank. Photo /  Glenn Taylor
'Massive pressures' on the building industry are part of a recipe for higher home-grown inflation, says Westpac Bank. Photo / Glenn Taylor

Annual inflation is poised to slide to its lowest point since 1999 in the June year, marking the fourth straight quarter where it has undershot the Reserve Bank's medium-term target band of 1-3 per cent, Westpac said.

The bank said next Tuesday's consumers price index would show a 0.2 per cent gain over the quarter, and annual inflation of 0.7 per cent - a new low point for this cycle - but it said the days of very low inflation were numbered.

Westpac economists said in a commentary the steep rise in the New Zealand dollar over the last year created a "substantial downdraft" on the prices of internationally traded goods.

"We believe this effect has now peaked and if the currency extended its recent decline, it could become a significant inflationary force in coming years," the bank said.

With the New Zealand dollar index hitting a new post-float high in the June quarter, another quarter of soft consumer price inflation was highly likely.

"Persistently low inflation requires an ever-rising exchange rate - the trade-weighted index over the June quarter was up 7 per cent on a year earlier - so even if the exchange rate steadies from, its depressing effect on prices will wane," the bank said.

"And if it extends its decline, it could become a major source of inflation."

Meanwhile, a strengthening economy, a hot housing market and "massive" pressures on the building industry were a recipe for higher home-grown inflation in the future, the bank said.

Two themes would drive the June quarter figures - the New Zealand dollar and housing.

The bank said the Kiwi, while it had started to fall since May, it was still at a record high on average over the quarter.

"A rising exchange rate puts downward pressure on the prices of imported and import-competing goods, and we suspect that this depressing force reached its peak in the last year," it said.

The bank estimated that tradeable goods prices fell 1.3 per cent in the year to June, the steepest decline since 2004, which in turn was the steepest on record.

Westpac said the pickup in the housing market could influence prices in a variety of ways through the purchase price for new houses, rents, property maintenance, and legal and real estate agent fees.

The bank noted that housing-related inflation had been modest at a nationwide level but that the pace was gradually increasing.

Looking ahead, what happens to the New Zealand dollar would be crucial, the bank said.

"Even if it were to hold steady, it would be less of a disinflationary force from here on. And if it extended its recent decline, it could become a major cause of inflation in coming years," the bank said. "Either way though, we suspect that the NZ dollar's long-running uptrend has broken."

The New Zealand dollar traded this morning at US78.47c, down from a peak of US86.75c in April and a post-float high of US88.43c in August, 2011.

The consumers price index increased 0.9 per cent in the year to the March 2013 quarter, following increases of 0.9 per cent and 0.8 per cent in the years to the December 2012 and September 2012 quarters,

- APNZ

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