Inflation eased in fourth quarter as fuel costs fell

Tuesday 20th January 2009

New Zealand inflation abated in the fourth quarter as the price of fuel tumbled, giving the central bank more room to cut interest rates at its next review on January 29.

The consumer price index fell 0.5% in the fourth quarter, for an annual rate of 3.4%, according to Statistics New Zealand. The quarterly drop was lower than the 0.4% decline forecast in a Reuters survey, helping drive down the kiwi dollar.

Petrol prices tumbled 22%, driving the transport prices index down 7.6%. So-called non-tradeables inflation was 0.8% in the latest quarter on higher rents and utility costs, slowing from a 1.3% rate in the third quarter.

"While the non-tradable is still on the high side, it is heading in the right direction," said Robin Clements, chief economist at UBS New Zealand. Fuel prices continued to decline in the past week or so, meaning inflation has room to abate more this year, he said.

Clements is forecasting the central bank to cut the official cash rate by 100 basis points to 4% next week, and to make a further two cuts in March and April, taking the OCR to just 3%.

The New Zealand dollar fell to 53.54 US cents from 54.17 cents before the CPI report was released this morning.

The inflation data comes after the Quarterly Survey of Business Opinion, released last week, showed a net 3% of firms plan to reduce prices in the next three months, the first time since December 1998 that the net balance of companies plan to cut prices. The QSBO showed companies were the gloomiest about their own activity since at least 1970 and the recession drives down demand for goods and services.

"Soft demand conditions will reduce firms' pricing power," UBS's Clements said.

Fourth-quarter inflation was weaker than Reserve Bank Governor Alan Bollard's 0.3% forecast and some economists say the annual rate may slip below the bottom of his 1% to 3% range this year.

"We expect annual inflation to temporarily fall below the bottom of the RBNZ's target band by the September quarter," said Philip Borkin, economist at ANZ National. "Food prices should eventually begin to respond to international commodity price developments and services inflation should ease as the labour market weakens further."

Annual inflation has collapsed after reaching a rate of 5.1% in the third quarter, the highest in 18 years.

By Jonathan Underhill

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