Inflation drops to lowest since 1999

The latest Quarterly Survey of Business Opinion says business confidence in the second quarter of 2013 remained at its 3-year high. Photo / NZ Herald

The lowest annual pace of inflation in 14 years is relieving pressure on the Reserve Bank to have to raise interest rates this year, as rising construction costs stay contained.

The consumer price index rose 0.2 per cent in the three months ended June 30, just shy of the 0.3 per cent expected in a Reuters survey of economists, for an annual pace of 0.7 per cent, according to Statistics New Zealand. That's the fourth quarter that the annual pace has been below the Reserve Bank's target 1 per cent to 3 per cent target band, and is the slowest annual pace since 1999.

Housing and household utilities prices rose 1.1 per cent in the quarter for an annual rise of 3.1 per cent. Newly built house prices rose 1.7 per cent in the quarter for an annual pace of 4.1 per cent, and rental prices rose a quarterly 0.4 per cent and an annual 2.1 per cent.

Darren Gibbs, chief economist at Deutsche Bank NZ in Auckland, said rising building costs aren't spilling over into general price increases, rather they're a sector-specific price movement as resources shift to meet the supply hole in the housing market and ultimately cap house prices.

Because construction pressures aren't pushing up prices in other goods and services, the Reserve Bank can keep rates on hold, he said. Food prices rose at an annual 0.2 per cent pace, while apparel prices shrank 1.8 per cent, household contents and services price fell 2 per cent and recreation and culture group prices fell 1.5 per cent.

"Not only is there no smoking gun for a hike in the OCR, there's no gun at all on the basis of the CPI figure," he said.

Gibbs doesn't expect the central bank to lift the OCR until March next year at the earliest, and said it may have scope to delay that further if home lending restrictions take some of the heat out of the property market.

The central bank has been reluctant to lift the key rate to head off the property market as it might stoke investors to buy the kiwi, further strengthening an "overvalued" currency. Instead, it's looking at limiting the amount of mortgage lending banks can make with small deposits.

The kiwi dollar averaged 76.55 in the second quarter on a trade-weighted basis, below the Reserve Bank's projected 77.50. The TWI recently traded at 74.28 after the CPI report was released from 74.36 immediately before. The kiwi dipped to 78.05 US cents from 78.17 cents.

The decline in the currency since the start of May will increase the tradables component of inflation, which includes goods and services facing international competition. Tradable inflation shrank 0.5 per cent in the June quarter, and fell 1.6 per cent on an annual basis.

Tradable prices are at the lowest level since the September 2010 quarter, just before the government hiked goods and services tax 2.5 percentage points to 15 per cent. Non-tradable inflation rose 0.6 per cent in the quarter and was up an annual 2.5 per cent.

That's fed into cheap imported petrol prices, which have kept a lid on general inflation. Petrol prices fell 2.5 per cent in the quarter, the biggest quarterly decline since September 2011, and were down 2.8 per cent on an annual basis. Since the end of the quarter petrol prices have increased 5 per cent.

"We're on course for a very big lift in tradable prices in Q3" and on an annual basis could be flat in the period, Gibbs said.

Food prices rose 0.2 per cent in the quarter, led by a 7 per cent increase in vegetable prices. On an annual basis, food prices rose 0.2 per cent. Grocery food prices shrank 0.2 per cent in the quarter and were down 1.5 per cent on an annual basis.

Retailers trimmed their level of discounting in the quarter, with 14 per cent of stock sold at a lower price compared to 16 per cent in the March period. Clothing and footwear showed the biggest pull back with 15 per cent sold at a discount compared to 22 per cent in March.