Flatlining CPI brings drop in annual inflation rate

By BRIAN FALLOW economics editor

Inflation scored a duck in the June quarter.

The unchanged consumers price index brought the annual inflation rate down to 1.5 per cent, from 2.5 per cent three months ago.

After averaging 2.7 per cent over the previous three years, inflation has now dropped well below the mid-point of the Reserve Bank's 1 to 3 per cent target band.

The quarterly result was flattered by some one-off factors.

Petrol prices fell 9.7 per cent early in the quarter, giving up their pre-Iraq war rise. Without that fall the CPI would have risen 0.4 per cent.

International airfares fell 0.7 per cent as airlines scrambled for business in the teeth of a Sars-related reluctance to travel. And though food prices fell 0.3 per cent in the quarter, they are unchanged from a year ago.

On the other side of the ledger, construction costs rose 1.8 per cent in the quarter, with firms surveyed citing rising costs of building materials as the main reason, followed by higher sub-contractors' charges and labour costs.

The strength of the housing market was also evident in rents, which rose 1 per cent, making 3.2 per cent for the year. Electricity prices rose 1.8 per cent, continuing an 18-month upturn. They are 4.8 per cent higher than a year ago.

Overall, however, price increases were less widespread and price decreases more widespread than in the March quarter.

But the silver lining of a rising exchange rate shows in lower prices for new cars, lower still for used ones, and for domestic appliances.

Tradeables inflation - in sectors affected by international prices and the exchange rate - has turned negative, prices having fallen 0.6 per cent over the past year on the Reserve Bank's reckoning.

But that is offset by non-tradeables inflation running at an annual rate of 3.8 per cent.

Westpac economist Nick Tuffley expects the inflation rate to stabilise at or below the midpoint of the 1 to 3 per cent target range over the next 18 months.

"Domestic price pressures, particularly in the housing sector, will be amply offset by subdued price pressures in export and import-competing industries. The rising New Zealand dollar will also continue to dampen import prices over the rest of 2003," he said.

The New Zealand Institute of Economic Research's quarterly survey of business opinion last week pointed to a weakening of inflation pressures.

Only a net 1 per cent of respondent firms reported raising their selling prices in the June quarter, down from 11 per cent in March.

The proportion of firms intending to raise their prices in the next three months fell from a net 15 per cent in the previous survey to a net 4 per cent, reflecting a drop in the proportion of firms reporting increased costs.