KEY POINTS:
After a year of painful price hikes, shoppers can breathe a sigh of relief, but only for a short while, as economists say this year will still be tough.
The consumers price index (CPI) rose 3.4 per cent in the year to December as cheaper pump prices pulled
it back from a petrol-induced high of 5.1 per cent growth in September.
In the short term, economists predict falling inflation will almost certainly spur another cut in mortgage rates.
While plunging petrol prices dragged household costs down half a per cent in the three months to December - the biggest quarterly drop in a decade - other price falls put summer salad favourites lettuce, tomatoes and cucumber back on the menu.
Statistics NZ figures show petrol prices dropped 22.4 per cent over the three months. At the same time, diesel prices fell 26.9.
ASB chief economist Nick Tuffley said cheaper petrol and lower mortgage costs meant many people had more money in their pockets. But he warned the extra cash might not find its way into shop tills. After a year of scrimping on petrol, it was likely that using the car more, increasing savings and paying off debt would figure higher in people's priorities.
Mr Tuffley and Westpac economist Doug Steel said many people were saving more because they were spooked by a combination of falling house prices, job losses and troubles in the world economy. "This year is going to be another tough year," said Mr Tuffley.
On the bright side, those with cash to spend had a good year to buy gadgets. CPI categories that include cellphones and audiovisual gear (such as TVs, DVD players, digital cameras and MP3 players) either came down in price or increased in quality for the same price.
But the CPI revealed a picture of eye-watering price hikes for necessities such as food and power.
Food prices rose 9.4 per cent in the year to December, pushed up by hard-to-avoid staples such as bread, fruit and vegetables, and meat and fish. Electricity rose 7.7 per cent over the same time.
December brought relief to salad lovers, at least, as lettuce, tomatoes and cucumber - which soared last year after an unusually wet growing season - dropped in price by up to half in the final three months of the year.
Mr Tuffley said March would bring a second quarterly drop in prices, as dairy and fruit got cheaper and petrol continued to fall. Economists expect inflation to dip below 1 per cent in September, a year after its 18-year high of 5.1 per cent. The Reserve Bank's target for medium-term inflation is between 1 and 3 per cent.
There is little the Reserve Bank can do about petrol prices. Mr Tuffley said inflation patterns would look more normal once the "extreme distortions" caused by petrol had settled.
Mr Steel said that, while cheaper petrol was good news for the economy, the underlying factors behind the drop were bad.
"When you think about why those petrol prices have fallen, it's because the international economy is in dire straits. While we might be facing lower costs at the petrol pump, New Zealand Inc is actually getting much lower income from our commodity exports."
Mr Steel said business confidence surveys - which he said tended to predict growth and the CPI quite accurately - showed economic activity was going to be very weak this year.
