Editorial: Stodgy economy raises the threat of deflation

A 4.5 per cent rise in power prices during the June quarter was not enough to push the consumers price index above 0.3 per cent. Photo / Mark Mitchell

The ravages wrought by rampant inflation should never be underestimated.

Equally, however, there was only muted applause this week when it was announced that annual inflation was 1 per cent for the June 30 year, the lowest since 1999. This is much preferable to the 5.3 per cent recorded a year ago.

But it also provided, most significantly, renewed evidence of a stodgy economy, a surprisingly robust 1.1 per cent gross domestic product increase in the March quarter notwithstanding.

When ongoing economic gloom reduces the likelihood of inflation for a good while, there is always the threat of deflation. In such circumstances, central banks must keep interest rates low and do all they can to ensure the cost of borrowing does not hinder an early recovery. That is good news for mortgage-holders, in particular.

Barring further global economic trauma, the Reserve Bank is likely to to keep the official cash rate at 2.5 per cent for the foreseeable future.

Inflation at the lower end of the bank's target band should also help household consumption hold up.

Imports are cheaper, with the price of television sets, for example, down 19 per cent in the past 12 months. But the scenario in New Zealand is clouded by many people's renewed emphasis on saving.

A steady pick-up may have to await clear evidence of an economic revival. Much of the momentum for that will come from the rebuilding of Christchurch. As it gathers pace, so will fears of deflation diminish.