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Home / Business / Economy

Analysts expect lowest inflation rate since 1999

Brian Fallow
By Brian Fallow
Columnist·NZ Herald·
15 Jul, 2012 05:30 PM3 mins to read

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Construction costs, rents and housing-related costs are expected to feature prominently in tomorrow's inflation stats, - expected to be the lowest annual rate since 1999. Photo / Thinkstock

Construction costs, rents and housing-related costs are expected to feature prominently in tomorrow's inflation stats, - expected to be the lowest annual rate since 1999. Photo / Thinkstock

Economists expect tomorrow's inflation report to record the lowest annual rate since 1999, reflecting soft domestic demand and a strong dollar.

The median pick among forecasters polled by Reuters is for a 0.5 per cent rise in the consumers price index in the June quarter, which would bring the annual rate down to 1.1 per cent, from 1.6 per cent in March.

Housing-related costs are expected to feature prominently, particularly rents, construction costs and property maintenance, which between them make up about a sixth of the CPI by expenditure weight.

ASB economist Christina Leung said post-earthquake rebuilding was under way and business surveys pointed to emerging capacity pressures in the building sector.

There was anecdotal evidence of a tight rental market in some regions, though the increase in rents might be lower than the 0.9 per cent recorded in the March quarter as more people tended to move over the summer, she said.

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Westpac economist Michael Gordon is picking a conspicuous 3.9 per cent quarterly rise in household energy prices, which would be the largest on record, because of a jump in line charges to fund major investment in the national grid.

Inflation in the tradables sector, where local prices are influenced by international prices and the exchange rate, has been curbed over the past year by a high kiwi dollar.

While the dollar fell 1.7 per cent in the June quarter on a trade-weighted basis, it remains high by historical standards.

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"The strong New Zealand dollar will continue to suppress prices for many household goods," Gordon said, "although this effect is likely to be fading, as the currency no longer has the consistent upward momentum that it showed from mid-2009 to mid-2011."

Gordon expects a relatively small 0.6 per cent quarterly rise in fuel prices for the quarter as a whole. "After reaching near-record highs through April and May, petrol prices fell sharply in June ."

Leung expects some boost to tradable inflation from rising car prices. Car sales had recovered in recent months as households felt more optimistic about making major household purchases and imports from Japan resumed after the disruptions caused by the earthquake and tsunami.

More broadly, subdued household demand combined with a high New Zealand dollar had led to discounting by retailers, she said.

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Last week's quarterly survey of business opinion from the New Zealand Institute of Economic Research found a net 5 per cent of firms reporting they had raised their selling prices over the past three months. That continues a declining trend evident over the past year and is well below the long-run average of a net 27 per cent for that indicator.

At the same time a net 26 per cent of firms reported higher costs and a net 13 per cent a deterioration in profitability.

"Price increases are subdued and merchants are cutting prices in the face of stagnant demand," NZIER principal economist Shamubeel Eaqub said. "Margins are razor thin."

The Reserve Bank is forecasting 0.5 per cent inflation for the quarter and 1.1 per cent for the year, in line with the private sector consensus.

In last month's monetary policy statement it said measures of underlying inflation indicated inflation pressures were modest and consistent with medium-term inflation remaining about the mid-point of its target band, 2 per cent.

Accordingly, most economists do not expect the bank to raise the official cash rate before the March quarter next year.

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