Inflationary pressures stay strong, despite soft figure

By NZPA

Monday 15th October 2007

Economists are warning that inflationary pressures remain strong, despite softer than expected inflation figures out today.

Statistics New Zealand (SNZ) put the rise in the consumers price index (CPI) for the September quarter at just 0.5%, compared to the median forecast of 0.8% in a Reuters poll of economists.

The annual rate fell to 1.8%, compared to a median forecast of 2.1%.

Bank of New Zealand head of research Stephen Toplis said the impact of government charges and subsidies on the figures had been "dramatically underestimated" in estimates before the data was published.

The figures tended to suggest at face value that the Reserve Bank had finally got its hands on the throat of inflation and might start to consider easing back on interest rates.

"However, in our opinion, this interpretation couldn't be further from the truth," Toplis said.

"The truth is that inflationary pressures remain very strong."

Three factors artificially depressed the quarterly inflation data, including a "meagre" 0.6% increase in non-tradable inflation -- goods and services that face no foreign competition.

Those factors included government subsidies that slashed the cost of early childhood education by 32.4%, Toplis said.

New subsidies also saw the cost of pharmaceuticals slump 16.2%, while the cost of a doctor's visit dropped 22.6% following the introduction of subsidies for a much wider section of the community than covered previously.

By BNZ's estimates, if those one-off items were removed then quarterly inflation jumped 0.9%.

Non-tradable inflation looked even "uglier", rising from 0.6% to 1.1% for the quarter, and to an eight quarter high of 4.2% for the year.

"This being the case, we would be surprised if the Reserve Bank found any solace whatsoever in today's data."

The Reserve Bank, which has a target range for inflation of 1% to 3%, has lifted interest rates four times this year to 8.25% due to concerns about robust domestic spending.

ASB economists Nick Tuffley and Daniel Wills also warned that underlying domestic inflation pressure remained persistently strong, particularly from housing and food price-related sources.

Lower near-term headline inflation would bring marginal relief to inflation expectations-related price pressure, and the high New Zealand dollar would help limit the flow through of sky high global oil prices on to domestic petrol prices.

"But the bottom line is that domestic inflation pressures are ebbing only slowly," the ASB economists said.

The Reserve Bank would need to see further evidence of a sustained downtrend in domestic spending-related inflation pressure before it considered lowering interest rates. By their estimates that would be in late-2008.

Citigroup economic and market analysis director Annette Beacher said much of the annual rate was due to large increases from last year dropping out.

At this early stage she expected a pick-up to 2.75% for year-end, she said.

But today's data did provide an offset to other strong data in recent weeks.

Given that home sales continued to soften, and the CPI starting point was lower than expected, she no longer expected a hawkish tone from the Reserve Bank at next week's review of the official cash rate.

Instead the Reserve Bank was likely to announce another neutral stance.

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