September inflation below forecasts

Food continues to be a source of inflationary pressure. File photo / Martin Sykes

September quarter inflation was a positive surprise, coming in at 0.4 per cent, when the market had expected 0.7 per cent.

It brought the annual rate down to 4.6 per cent from 5.3 per cent three months ago.

Excluding the impact of the increase in GST a year ago, the annual rate would have been 2.5 per cent, Statistics New Zealand said.

The September quarter figures benefited from lower petrol prices compared with their peak in June. Petrol fell 3.3 per cent and diesel 7.7 per cent in the quarter. Petrol has still risen 18 per cent over the past year and rose back to July levels last month.

Food continues to be a source of inflationary pressure, rising 1.7 per cent in the quarter (including a 9 per cent increase in fruit and vegetable prices) on top of 1.1 per cent in the June quarter and 1.1 per cent in March.

Food contributed 25 per cent of the CPI's 4.6 per cent annual increase, though it makes up 19 per cent of the index.

Rents rose 0.5 per cent, as in the June quarter, led by Auckland, while local body rates rose 4.1 per cent.

But electricity prices fell 0.3 per cent - only the third decline in the past 10 years - reflecting a scramble by the state-owned power companies to realign their retail customer bases with reshuffled generation assets.

Overall, non-tradeables inflation, which reflects prices not subject to international competition or affected by the exchange rate, was up 0.6 per cent for the quarter, unchanged from June and 2.4 per cent annualised.

Tradeables prices benefited from a high exchange rate.

Audio-visual and computing equipment fell 4.8 per cent and telecommunications equipment fell 9.2 per cent.

"Both groups are in a major trend decline in prices due to advancing technology, but the stronger New Zealand dollar hurried them along," Westpac economist Michael Gordon said.

"And telecommunication services fell 3.5 per cent, reflecting increased data caps for broadband and mobile phone internet packages - effectively a quality-adjusted price decline."

The Reserve Bank had forecast a quarterly increase of 0.7 per cent, in line with private sector forecasters.

But the trimmed mean measure, which excludes the largest rises and falls and reflects the broad mass of prices in between, was just 0.2 per cent in the quarter, the smallest since June last year.

And by the bank's own measure, underlying annual inflation was 2.2 per cent.

"The result will give the Reserve Bank more comfort in its forecast that inflation will fall into the lower half of the 1 to 3 per cent target range next year, once the GST hike and other government charges fall out of the equation," Gordon said, "and supports our call that OCR hikes will be delayed until June next year."

The financial market reacted by selling the kiwi dollar and lowering interest rates by six basis points two years out.

Deutsche Bank chief economist Darren Gibbs expects the CPI to increase 0.4 per cent in the December quarter.

"With last year's GST increase due to drop out of the annual calculation, this would reduce the annual inflation rate to 2.6 per cent - back inside the Reserve Bank's target range."

There is little sign of any significant inflation pressure, outside of that generated by the Government or through higher international commodity prices, Gibbs said.

The consensus among economists has been that the Reserve Bank will not need to start raising the official cash rate until March next year.