Westpac chief economist Dominick Stephens said today's CPI figures were "an important downside surprise for the Reserve Bank", and it and supported the his expectation that any increase in the Official Cash Rate would be delayed until June next year.
"The September quarter CPI came in well below expectations, rising 0.4 per cent for the quarter and 4.6 per cent on a year ago. The main surprises were some substantial price drops due to greater competition in several industries - this is not a bad thing of course, but it's not necessarily something that will be seen on an ongoing basis," said Stephens.
A stronger NZ dollar over the quarter accounted for some of the price declines, with audio-visual and computing equipment falling 4.8 per cent and telco equipment down 9.2 per cent.
The biggest downward surprises were in the non-tradables arena. Electricity prices fell 0.3 per cent, a rare quarterly decline.
Financial markets, which had been positioned for a 0.7 per cent outturn, reacted sharply to the surprise. The New Zealand dollar was down 40 points to 0.8040, and the two-year swap rate fell 6 basis points.
"For the Reserve Bank, the surprise was almost entirely on the non-tradables side, which is considered to be more problematic. Today's result will give the Reserve Bank more comfort in its forecast that inflation will fall into the lower half of the 1-3 per cent target range next year, once the GST hike and other government charges fall out of the equation," said Stephens.
"Our pick for the first OCR hike to be in June next year, later than the market median of March, has been strengthened by this result."
Darren Gibbs, economist at Deutsche Bank, said the key factors driving the lower than expected CPI outcome was a smaller than expected 1.3 per cent increase in alcoholic beverage prices, an unexpected 3.5 per cent fall in telecommunication services prices and an unexpected 3.8 per cent per cent decline in the volatile international airfares component.
He said he expected the CPI to increase by 0.4 per cent in the fourth quarter of this year.
Gibbs said that "inflation fears perpetuated by some domestic commentators this year" were wide of the mark.
There were few signs of any significant inflation pressure outside of that generated by the Government or due to the pass-through of higher international commodity prices.
"That should not be surprising given the patchy performance of the broader economy. Today's benign CPI report support adds weight to our view that in the current uncertain economic environment there is little obvious need for domestic policy tightening in the near term at least."
Gibbs said he expected this tone would be reflected in the statement that comes out on Thursday accompanying the Reserve Bank's review of the Official Cash Rate.
"Indeed, after today's CPI report, we think that there is absolutely no prospect of any increase in the RBNZ's OCR this year," said Gibbs. "Moreover, we think that even the increase that we have been predicting for March next year will prove unnecessary if the economy is not able to gain additional forward momentum over coming months, in part due to weaker activity offshore."
A Reuters survey of 13 economists found most were expecting a slightly higher quarterly inflation rate of 0.7 per cent for an annual rate of 4.7 per cent.
That is be down from 1 per cent and 5.3 per cent respectively three months earlier.
The Reserve Bank, which was also picking 0.7 per cent inflation, is expected to keep the official cash rate at 2.5 per cent, highlighting the global risks while reiterating the potential for a future increase.
International air fares fell 3.7 per cent in the last quarter, mostly due to cheaper flights to Asia, said Statistics NZ.
Communication prices were down 3.6 per cent, which Statistics NZ said reflected increased data caps for broadband plans and cheaper international calling rates.
- In the year to the September 2011 quarter, the CPI rose 4.6 per cent, including a 2.3 per cent increase in the December 2010 quarter when GST rose from 12.5 to 15 per cent.
Key contributions to the rise came from transport -up 8.8 per cent, food - up 6.2 per cent, housing and household utilities -up 3.7 per cent, and alcoholic beverages and tobacco - up 5.6 per cent.
On an annual basis, petrol prices increased - up 18 per cent, while the price of cigarettes and tobacco -up 12 per cent, vegetables - up 18 per cent, purchase of new housing up 3.7 per cent, electricity - up 4.6 per cent, and local authority rates -up 6.6 per cent also rose.
- NZ HERALD ONLINE
