Tomorrow fresh statistics will tell us that the cost of living is barely rising at all.

The Consumer Price Index for the September quarter is forecast to show inflation has fallen in the past three months and is only just above zero for the year .

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.

That's dangerously close to deflation and it will be treated as bad news by economists.


But many New Zealanders will be feel that the low inflation story doesn't stack up with their daily experience.

That's because one of the largest and most fundamental 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 like 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. 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 groceries bills aren't rising very fast.

But despite occasional efforts to re-weight the CPI to reflect household, average inflation won't feel like it matches the rise in the real world costs for many.

Meanwhile the fall in the top line inflation figure is considered nominally bad news for the experts - one of just a few dark spots in another otherwise rosy-looking economic picture.

Explaining why falling prices are a bad thing for an economy is difficult. Infact, it seems 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.

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

The two feed off each other as lower consumption forces business 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 in New Zealand despite the fact that we are now 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.

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.

Last week RBNZ chief economist John McDermott expressed confidence that inflation will rebound to the bottom of the target band (1 per cent) in the December quarter.

Nevertheless the RBNZ can't afford to be complacent and that's why a rate cut in November is now tipped as a near certainty with most economists picking another one in February.

While some argue that structurally low inflation globally means we should reassess the inflation target, CPI provides a good theoretical measure for monetary policy to pivot around.

But it is important to recognise that it doesn't always provide an accurate measure of our relative wealth.