Lower inflation rate not expected to last

By Brian Fallow

WELLINGTON - Weaker-than-expected inflation in the March quarter drew a "that was then, this is now" response yesterday from economists, who see inflation pressures gradually rising from here.

The consumers price index excluding credit services (CPIX) rose 0.2 per cent, compared with the Reserve Bank's expected 0.3 per cent and the median private sector forecast of 0.4 per cent.

The result brought the annual CPIX rate down to 1 per cent, the lowest it has been since the series began in 1988.

The main surprise was in the housing group, which makes up 19.5 per cent of the CPI. It fell 0.7 per cent, mainly because of lower public sector rents and a 6.7 per cent fall in section prices.

There is a one-quarter lag in that component, so the recent firming in the housing market has yet to be captured. Deutsche Bank chief economist Ulf Schoefisch said that to gauge the medium-term trends it was important to strip out the noise in the latest result.

"That includes the weather-related 5.6 per cent rise in fruit and vegetables prices, the one-off fall in state rentals, the seasonal fall in air fares, apparel and stationery supplies, the usual March quarter rise in tertiary education fees, as well as a further drop in petrol prices as a result of structural changes in the retail market," Mr Schoefisch said.

"That leaves us with the more reliable indicators of underlying inflation trends like grocery food (up 0.4 per cent), household appliances and furnishings (up 0.1), new and used cars (up 1.3) tobacco and alcohol (up 0.5) and personal and health care costs (up 0.6)."

These pointed to an underlying inflation trend of 1.5 to 2 per cent, he said. He continued to expect the Reserve Bank to be forced to raise the cash rate, in August or November, by 50 basis points to 5 per cent.

ANZ Bank chief economist Bernard Hodgetts pointed to one-off factors which had kept the CPI low over the past year but which were now working out of the system.

Car prices were on the rise again after falling since mid-1996. "Telephone calls rose 1.8 per cent over the quarter, suggesting that the sharp falls seen in the first part of 1998 are not continuing."

Though electricity prices fell 1.3 per cent in the March quarter, TransAlta, which operates in all three main centres, has announced prices rises to take effect this month. With short-term interest rates anchored by the Reserve Bank's official cash rate, the recent strength of the New Zealand dollar represented a significant strengthening of monetary conditions, Mr Hodgetts said.

Combined with the weak inflation outcome, that would ensure no change to the cash rate in today's review. "If the New Zealand dollar continues to strengthen, the prospect that the Reserve Bank could actually lower the cash rate over the next few months to prevent monetary conditions from tightening excessively at this early stage of the economic recovery would have to be considered," Mr Hodgetts said.

But he expects the dollar to retrace some of its recent gains, because of further weakness in commodity prices, balance of payments concerns and political uncertainty.

Bankers Trust chief economist David Plank said nothing in yesterday's numbers changed his view that the Reserve Bank would raise the cash rate some time between November and March.