KEY POINTS:
Inflation figures for the December quarter released yesterday provide evidence inflationary forces are abating and are seen as providing no impediment to the 100 basis point official cash rate cut financial markets are expecting next week.
The consumer price index fell 0.5 per cent - the steepest quarterly fall for 10 years - pulling the annual rate down to 3.4 per cent from an 18-year high of 5.1 per cent in September.
A 22 per cent fall in petrol prices was largely responsible. Excluding petrol prices (and diesel which was down 27 per cent) the CPI would have risen 0.9 per cent and annual inflation come in at 3.6 per cent.
But the analytic measures Statistics New Zealand provides show a broader-based retreat.
Of the nearly 700 items in the CPI, fewer rose, and by less, than in the September quarter, while more fell and more sharply. A weighted 61 per cent of the index rose, compared with 71 per cent in the previous quarter, and the average increase was 2.7 per cent, down from 3.1 per cent.
The 10 per cent trimmed mean measure, which ignores the largest rises and falls and reflects the broad mass of prices in between, recorded an increase of just 0.2 per cent in the quarter, the smallest for two years.
Non-tradeables inflation, reflecting the half of CPI undisciplined by international prices or the exchange rate, rose 0.8 per cent, down from 1.3 per cent in the September quarter. Annual non-tradeables inflation, however, remains high at 4.3 per cent.
Last month Reserve Bank Governor Alan Bollard took a swipe at those responsible for some of the stickier non-tradeables prices, including power companies and local authorities.
Yesterday's figures included a 2 per cent quarterly increase in electricity prices, making 7.7 per cent for the year, while rates rose 1 per cent in the quarter and 6 per cent for the year.
But one long-standing hotspot - construction costs - fell 0.2 per cent in the quarter.
Some of that was a one-off "quality adjustment" in the statistics to allow for the effects of tougher building standard in Auckland.
But Westpac economist Doug Steel said movements in construction costs in other regions, and other indicators, suggested a substantial softening in the trend for construction costs. "This will be encouraging for the Reserve Bank," he said.
The biggest upward influence on the CPI was food prices, up 1.5 per cent, as more expensive beef, poultry and bread swamped a drop in vegetable prices. Over 2008 as a whole, food prices rose 9.4 per cent.
But Steel expects food inflation to fall quickly, in light of the steep falls in global commodity prices.
Deutsche Bank chief economist Darren Gibbs expects the March quarter to record a further 0.5 per cent decline (petrol again).
That would haul the annual inflation rate down to 2.2 per cent, en route to 1 per cent in June and close to zero in the September quarter, Gibbs said.
Overall or "headline" inflation would then head back towards the middle of the Reserve Bank's target band (2 per cent) as the steep falls in oil prices dropped out of the annual tally.
DOWN, DOWN
* Consumer prices fell 0.5 per cent in the December quarter, making 3.4 per cent for the year.
* Petrol provided most of the relief, but overall price rises were less widespread and on average smaller than in September.
* The markets expect the Reserve Bank to cut its official cash rate from 5 to 4 per cent next week.
