New Zealand consumer prices rose at a slower-than-expected pace in the third quarter on falling transport, taking the annual pace of inflation below the Reserve Bank's target band.

The consumer price index rose 0.3 per cent in the three months ended September 30, according to Statistics New Zealand, slower than the 0.5 per cent forecast by the central bank. The annual pace of inflation slowed to 0.8 per cent, below the 1 per cent forecast by the Reserve Bank and outside its target band of between 1 per cent and 3 per cent. That's the first time it's dropped below the target band since 2002.

"Increases were countered by cheaper transport, telecommunications services and fresh milk," prices manager Chris Pike said in a statement.

Today's figures may fuel calls for the Reserve Bank to cut the official cash rate from its record-low 2.5 per cent in a bid to revive a slowing economic recovery and reduce the yield appeal of a strong currency. The New Zealand dollar has averaged 77.73 US cents this year, fuelling demands for the central bank to intervene in currency markets to bring the currency down.


The kiwi tumbled to 81.53 US cents from 81.80 cents immediately before the numbers were released.

Tradable inflation, which covers items open to foreign competition, was unchanged in the quarter, due to falling prices for second-hand cars, petrol and dairy products. On an annual basis, tradable inflation shrank 1.2 per cent.

Non-tradable inflation rose 0.5 per cent in the quarter at an annual pace of 2.3 per cent, mainly due to higher local authority rates.

Transport prices fell 1.1 per cent in the quarter, with the price of petrol down 1 per cent, second-hand car prices down 2.8 per cent and domestic air fares falling 7.8 per cent. Fresh milk prices fell 3.8 per cent in the quarter, while telecommunication services prices declined 1.8 per cent.

Food prices rose 1.1 per cent in the September quarter, led by more expensive produce, while grocery food prices fell 1.6 per cent.

Dwelling insurance prices surged 17 per cent in the quarter, and are up 43 per cent on an annual basis as insurers pass on rising reinsurance costs in the wake of a series of earthquakes that levelled Christchurch, the country's second-biggest city.

Local authority rates rose 3.6 per cent in the period, while rental prices increased 0.6 per cent, and newly built housing prices advanced 1 per cent.

Statistics New Zealand said the rates increase was one of several one-off events increasing prices in the quarter, along with the annual indexation of excise on alcohol duty, an 8.3 per cent hike in road user charges, and price increases for new driver licence classes.


Stripping out those one-off increases, the CPI rose about 0.2 per cent in the quarter.

The level of discounting by retailers accelerated in the quarter, with 12 per cent of prices collected at a lower price, down from 11 per cent in the June period.

The heaviest discounting came from major household appliances, at 35 per cent, followed by 29 per cent for small electrical household appliances and the same reduction offered on electrical appliances for personal care. Audio-visual equipment was reduced by 28 per cent.

ASB economist Jane Turner said the key surprise was the weakness in tradable inflation, which came largely due to the fall in transport prices.

Tradable CPI was now down 1.2 per cent on year-ago levels, largely due to the elevated New Zealand dollar, Turner said.

"With the NZD to remain elevated over the coming year, we expect tradable inflation pressures to remain subdued over the rest of 2012.

"However, deflation in these areas is masking a lift in domestic inflation pressures."

Turner expected the RBNZ would wait until September before lifting the OCR, previously estimating this would happen in June.

"Our view shift is largely based on other factors than the muted Q3 inflation outcome.

"The slow pace of Eurozone crisis resolution, coupled with dim Eurozone growth prospects, and likelihood of further RBNZ caution over persistent NZD strength all argue for a much later start than June."

Westpac chief economist Dominick Stephens said the "weaker than our below-market forecast" was mainly due to two quirks that were unlikely to be repeated - used car prices fell 2.8 per cent per cent and domestic airfares fell 7.8 per cent.

Housing-related inflation was starting to accelerate, with the cost of building a new house up 3 per cent nationwide over the past year, he said.

"Our concern is that the Canterbury rebuild will boost housing-related inflation, eventually forcing the Reserve Bank to increase the OCR.

"This story still looks very much on track."

Today's release comes a week after the New Zealand Institute of Economic Research's quarterly survey of business opinion showed local businesses were gloomier about the economy in a deteriorating trading environment. The Wellington-based consultancy sees the annual pace of growth slowing to 1.5 per cent in the second half of the year from a 2.6 per cent expansion at the end of June.

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