Figures show inflation fell back in 2005

Inflation eased from 3.4 per cent in the September year to 3.2 per cent in the year to December, but still remained outside the Reserve Bank's 1-3 per cent target, Statistics New Zealand (SNZ) said today.

The Consumer Price Index (CPI) in the December quarter rose 0.7 per cent -- below the 0.8 per cent average forecast of economists and below the Reserve Bank's (RB) prediction of 0.9 per cent.

Coming on top of a survey yesterday, published by NZIER, showing a collapse in business confidence to a 20 year low and indicating risks of an economic recession, today's news is likely to increase pressure on the Reserve Bank to not just hold interest rates at next week's review, but to cut them.

The CPI has been outside the RB's target for one quarter but is expected to remain there for most of this year as the effects of oil price rises, building costs and wage pressures feed into price rises.

The most significant contribution to the CPI in the December index came from the housing group, up 1.2 per cent, with prices for the purchase and construction of new dwellings up 1.6 per cent. Such prices increased 6.4 per cent in 2005.

Transport prices rose 1.0 per cent in the quarter with a 12.3 per cent rise in international air fares the biggest contributor. That was offset by a 3 per cent fall in petrol prices. Over the year, petrol however was up 17.4 per cent while air fares were down (correct) 3.2 per cent.

If petrol prices had not risen during the year, the CPI would have risen 2.6 per cent.

Inflation in the non-tradeable sector of the economy was 1 per cent during the quarter -- double the rate of inflation in the tradeables sector.

SNZ also released the December Food Price Index (FPI) today. It showed, food prices rose 0.6 per cent in the month as a result of higher food and vegetable prices (up 2.8 per cent) meat, fish and poultry (up 1 per cent) and grocery food, soft drinks and confectionery (up 0.3 per cent).

The FPI rose 2.2 per cent during the year.

During the December quarter food prices rose 0.5 per cent.

Foreign exchange dealers said that today's inflation data was likely to put further downward pressure on the New Zealand dollar.

It fell around half a cent in the wake of yesterday's business confidence survey.

BNZ chief dealer Mike Symonds said that any number that printed below 0.8 per cent was likely to result in further selling of the New Zealand as the traders figure the risk of the RB hiking interest rates again diminishes.

The New Zealand dollar was at US69.04c immediately after the CPI release, from its US69.07c open.

RB governor Alan Bollard has hiked interest rates nine times since the start of 2004 and said last month he could not rule out another rise.

However, Westpac chief economist Brendan O'Donovan said that yesterday's NZIER survey clearly showed the economy went into reverse in the December quarter and was likely to retreat further in the current quarter. He called on Dr Bollard to not just hold rates next week, but to start cutting them.

Bank of New Zealand economist Stephen Toplis said the central bank now had no excuse to raise rates next week.

As well as today's data and yesterday's survey, the September quarter GDP number had come in lower than predicted.

However, Mr Toplis said the RB might not be rushing to lower rates as lobby groups would be pushing for.

He noted non-tradeables inflation was only marginally down at 1.0 per cent in this quarter from the 1.1 per cent of the previous four quarters.

"That in itself will make the bank sufficiently cautious to leave them unlikely to be contemplating rate cuts any time soon." Mr Toplis said.

The bank had an issue with inflation expectations and the longer inflation stayed above the target then the greater the impact on expectations.

Mr Toplis said what happened to the currency was critical. Potentially domestic inflation may decline and tradeables inflation increase as the dollar fell.

He said the NZIER survey showed the risks to recession had increased, although he believed a rebound in agricultural products volumes in the December quarter would avert that.

"There is no question the economy is slowing," Mr Toplis said.

"It could be the worst of all worlds for the central bank, with inflation staying up and growth flagging."

- NZPA