KEY POINTS:
Prices rose an unexpectedly moderate 0.5 per cent in the September quarter, trimming the inflation rate to 1.8 per cent as one-off subsidies in early childhood education and the heath sector kicked in.
Market economists and the Reserve Bank had forecast a quarterly figure of 0.8 per cent, which would have pushed the annual inflation rate to 2.1 per cent for 2 per cent in June.
But economists said underlying inflation pressure remained strong, particularly in food and housing-associated prices.
Excluding central and local Government charges, prices rose 0.7 per cent for the quarter, and that was also the increase in a key measure of core inflation, the trimmed mean, which disregards the largest price rise and falls and reflects changes in the broad mass of prices in between.
Subsidies starting on July 1 cut prescription charges 16.2 per cent and general practitioner fees 15.4 per cent, while the policy of 20 hours' free early childhood education saw prices in that sector fall 324 per cent.
It is unusual for the public sector to be a disinflationary influence. Over the past year, for example, central and local government charges rose 2.3 per cent, outstripping inflation in the rest of the economy by half a percentage point.
The annual increase in local body rates is mainly recorded in the September quarter. This time it was a 6 per cent rise.
Electricity prices rose 0.8 per cent and gas prices 1.6 per cent.
Non-tradables inflation, reflecting goods and services unaffected by international competition, fell to 0.6 per cent, the lowest for six years, compared with an average quarterly increase of 1.1 per cent over the previous four years.
Bank of New Zealand economist Stephen Toplis said that without the one-off effect of the subsidies, non-tradables inflation in the quarter would have been 1.1 per cent too.
"This being the case, we would be surprised if the Reserve Bank found any solace whatsoever on today's data."
On the tradables side the high dollar contributed to falls in the prices of both used and new vehicles, consumer electronics, clothing and footwear.
Construction costs rose 1.8 per cent in the quarter. That was the strongest quarterly increase for 12 months, Deutsche Bank chief economist Darren Gibbs said. "Though you would have to think that would soften over the next year or two."
The Reserve Bank would be pleased the headline rate was low, he said.
"That stays with us for a year and may have positive implications for inflation expectations. [But] I still think rates will be on hold until the end of next year and conceivably beyond that."
Westpac economist Doug Steel said: "Sure the lower headline inflation figure will have a marginal downward effect on inflation expectations but these have a long, long way to fall before the Reserve Bank can relax."
Toplis expects inflation over the next year to be 2.8 per cent. A falling currency and Budget spending could make it a bigger problem in 2009.
