NZ Herald business editor at large

Liam Dann: Inflation now at dangerously low level

A cheaper TV or overseas holiday doesn't look so good if you've been laid off. Photo / Chris Gorman
A cheaper TV or overseas holiday doesn't look so good if you've been laid off. Photo / Chris Gorman

Inflation data due today is tipped to show the economy skating dangerously close to deflation.

Economists' forecasts for the September quarter Consumer Price Index have inflation falling in the past three months and now only just above zero on an annualised basis.

Most economists are picking it will come in at 0.1 or 0.2 per cent for the year to September 30 - down from 0.4 per cent in the year to June 30.

The fall is expected to be driven by lower transport costs as oil slumped again in the quarter while housing costs are likely to be the largest rising category.

Persistently low inflation is considered one of just a few dark spots in another otherwise rosy economic picture, although it is consistent with a number of other economies right now.

The deflation risk will weigh heavily on the Reserve Bank, which is required to target an inflation band of between 1 and 3 per cent, which it has been outside for two years.

The idea that falling prices are a bad thing for an economy can seem counter-intuitive.

But the problem as economists see it - and as witnessed in Japan over the past 20 years - is that when people expect inflation to be consistently low or deflation takes hold this can create a recessionary spiral.

Expectation things will become cheaper suppresses consumer spending and business investment.

The two feed off each other as lower consumption forces businesses to contract and focus on costs. That can start to cost jobs.

A cheaper TV or overseas holiday doesn't look so good if you've been laid off.

Thankfully, most economists don't see that scenario playing out, although we are now a whisker away from annual deflation.

There are expectations that we will see a rebound in the December quarter as the dollar is down and fuel costs are starting to rise.

The expectation that things will be cheaper in the future suppresses consumer spending and business investment.

That's certainly what the Reserve Bank will be hoping as it comes under increasing pressure to bring inflation back in to its mandated 1 to 3 per cent target range.

The need to lift inflation is one of the main reasons the bank has been cutting interest rates even though our GDP growth remains strong.

In a speech last week, RBNZ head of economics John McDermott expressed confidence that inflation will rebound to the bottom of the target band (1 per cent) in the December quarter.

Westpac chief economist Michael Gordon broadly agrees, although he warns that a sustained return to higher inflation is by no means assured.

The RBNZ can't afford to be complacent and today's figures will confirm a consensus that a rate cut in November is a near certainty.

Many economists are picking they will have to go further, cutting at least one more time - perhaps in February.

Regardless, for many New Zealanders the low inflation story doesn't stack up with daily experience.

That's because one of the largest costs we face in life continues to rise more than anything else.

House price inflation - other than for new builds - is excluded from the CPI so if you are saving for a home or taking on a giant mortgage you're not going to feel as though the cost of living has fallen.

And those accommodation costs that the CPI does catch are rising faster than any other category.

If we look at the breakdown of that category in the last set of data, for the year to June 30, we see some significant rises.

The cost of a new build was up 5.6 per cent, rates rose 5.5 per cent, rental prices were up 2.3 per cent and property maintenance was up 2.9 per cent. Household energy was also up 2 per cent.

These things represent the largest fixed costs for many New Zealanders.

So it is nice that fuel costs and the price of electronic gadgets are lower, and that grocery bills aren't rising very fast.

- NZ Herald

Get the news delivered straight to your inbox

Receive the day’s news, sport and entertainment in our daily email newsletter

SIGN UP NOW
NZ Herald business editor at large

Liam Dann is business editor at large at the New Zealand Herald. He has been a journalist for 20 years, covering business for the last 14 of them. He has also worked in the banking sector in London and travelled extensively. His passion is for Markets and Economics, because they are the engine of the New Zealand economy. He hosts The Economy Hub video show every Thursday.

Read more by Liam Dann

© Copyright 2016, NZME. Publishing Limited

Assembled by: (static) on production bpcf03 at 05 Dec 2016 18:09:06 Processing Time: 576ms