Bank hits the spot with CPI forecast

Consumer prices fell 0.2 per cent overall in the December quarter and economists see nothing in the measures of core inflation to spook the Reserve Bank into revising its view that it will be "around the middle of the year" before it needs to start raising interest rates.

The quarterly drop in the consumers price index was weaker than most market economists had expected, though it was bang on the Reserve Bank's forecast.

The annual rate rose to 2 per cent, from 1.7 per cent in September but only because the December 2008 quarter's 0.5 per cent decline moved from the latest to the prior year's number.

Importantly, inflation in the non-tradables sector, where prices are not influenced by international prices or the exchange rate, was just 0.1 per cent in the quarter, making 2.3 per cent for the year, the weakest annual rate since 2001.

That contrasts starkly with the 1 per cent reading for non-tradables inflation in the September quarter which had the Reserve Bank publicly fretting that the recession had not subdued domestic inflation as much has it had expected.

Other measures of core inflation were also benign. Trimmed mean measures, which exclude the largest rises and falls and reflect the broad mass of prices in between, were flat in the quarter, and excluding vehicle fuels inflation was minus 0.1 per cent.

Compared with September fewer items in the CPI basket rose, and by less, while more fell and by more.

"On balance there does not appear to be much evidence of broad-based price pressures starting to build," said ANZ National Bank economist Khoon Goh. "Inflation has hardly been crushed but it certainly looks contained."

As expected, lower food prices (down 2.4 per cent from September's weather-affected levels) were a major downward influence on the CPI, while alcohol and tobacco, postal services, and household contents and services also fell. Among the offsetting rises was a 1.5 per cent increase in transport costs driven by a seasonal 13.9 per cent rise in international air fares.

Goh was surprised at the lack of evidence of retail discounting in the data.

"There were widespread anecdotes of early and more aggressive discounting in the lead-up to Christmas.

Yet most retail-related prices rose, with the clothing and footwear group up a surprisingly strong 1.8 per cent, furniture and floorcoverings up 1 per cent, household appliances up 0.6 per cent and vehicle prices up 1 per cent."

Goldman Sachs JBWere economist Philip Borkin said yesterday's numbers gave the Reserve Bank breathing space.

"We feel they have time on their side. We remain comfortable with a June start to the tightening cycle."

BNZ economist Craig Ebert called the data "mild" and said they fitted the BNZ's view that the Reserve Bank could wait until mid-year before starting to take back some of its stimulus.

The markets had reacted along those lines, he said, with wholesale interest rates falling around 15 basis points.