Quarterly inflation in negative for first time in almost 6 years

By NZPA

Wednesday 17th January 2007

Cheaper petrol was the main factor in the New Zealand Consumers Price Index (CPI) falling 0.2% in the December quarter.

It was the first negative inflation figure in nearly six years.
Figures published today by Statistics New Zealand (SNZ) put the fall in the price of petrol during the December quarter at 15.2%, out of 3.9% fall in combined transport prices.

A 9.7% rise in international air transport prices had partly offset the decrease in petrol prices, SNZ said.

The fall in December quarter inflation followed rises of 0.7% and 1.5% in the September and June quarters respectively.

The extent of the easing in inflation would come as a surprise to most economists, with the median forecast in a Reuters poll having been for an unchanged CPI.

The quarterly decrease took the annual CPI increase to 2.6%, from increases of 3.5% and 4% for the years to the September and June quarters respectively. The economists' median forecast for the December year had been for an increase of 2.8%.

With the December quarter decrease, annual inflation was now back within the Reserve Bank's 1 to 3% target band. The question was whether Reserve Bank Governor Alan Bollard would lift interest rates at the next Official Cash Rate (OCR) review on January 25.

When he left the OCR at 7.25% in early December, Bollard warned that while the short-term inflation outlook had improved, the Reserve Bank was "less optimistic" about medium-term prospects.

Household spending continued to show surprising resilience and the labour market remained firm, while the housing market appeared to have developed new momentum.

The Reserve Bank's projections and risk assessment suggested a firmer monetary policy stance could still be needed to maintain downward pressure on inflation and further tightening could not be ruled out, Bollard said at the time.

SNZ said today that had petrol prices not changed from the September quarter, the CPI would have increased 0.6% in the December quarter.

Of 11 groups in the CPI, three decreased in the December quarter.
The most significant increases were from household and household utilities prices which rose 0.9% in the December quarter.

The most significant increases in the group were from actual rentals for housing, up 0.7%, and the purchase of new housing, up 1.0%.

Recreation and culture prices rose 1.5% in the December quarter, due to a 10.5% price increase for package holidays, SNZ said.

Along with the reduction in the price of petrol, the other significant individual downward contribution to the CPI in the December quarter was from a 13.2% decrease in the price of vegetables.

Along with the rises for international air transport and packaged holidays, the most significant individual upward contributions came from a 16.6% rise in the price of fruit and a 4.3% rise in meat and poultry prices.

Economists were divided on whether Bollard would hike rates next week.

First NZ economist Jason Wong said the figure threw doubt on a rate rise.

He said it was encouraging to see non-tradeables inflation at its lowest in over three years.

"This gives some comfort to the Reserve Bank and if you combine it with the other data we've seen since early December we don't think the Reserve Bank's going to hike next week."

Deutsche Bank economist Darren Gibbs said inflation was still expected to pick up and the picture had not changed.

"This obviously muddies the water for next week. Clearly this gives Bollard the possibility of delaying his hike until March, but for now I'm sticking with the call he does go next week."

Goldman Sachs JBWere economist Shamubeel Eaqub said Bollard was most concerned about non-tradeables inflation and had eased.

"I'm holding on to my view that they're not going to change, given the modest easing in non-tradeable inflation, and official activity data, particularly GDP, has been quite anaemic.

"I think it's an on-hold monetary policy path, but easing is obviously some way off."

The New Zealand dollar fell around half a cent to US69.05c shortly after the data was released.

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