High dollar, cheaper food expected to keep CPI stable

Economists are not expecting to see any rise in the consumers price index on Wednesday when December quarter inflation figures are reported, thanks to a high dollar and falling food prices.

The median forecast among market economists is no change in the CPI in the quarter. That would see the annual rate rise to 2.1 per cent from 1.7 per cent in September as December 2008's 0.5 per cent fall drops out of the tally.

ASB's chief economist Nick Tuffley, like the Reserve Bank, is picking a 0.2 per cent fall in the CPI for the quarter.

That includes a 2.2 per cent drop in food prices, which make up 18 per cent of the overall index. This largely reflected the unwinding of weather-related strength of vegetable prices in the winter, Tuffley said.

"We expect retail meat prices to decline over the December quarter, reflecting the fall in New Zealand dollar meat prices in international markets."

Tuffley expects tradables prices - those influenced by world prices and the exchange rate - to have declined by 1 per cent in the December quarter. The strength of the kiwi dollar over the second half of last year would continue to weigh on tradables inflation for much of 2010, he said.

By contrast non-tradables inflation, which ASB sees falling to 0.4 per cent in the December quarter, would not remain low for long.

Building consents have been rising for the past six months and Tuffley pointed to surveys of business sentiment that pricing intentions in the construction sector have almost returned to pre-recession levels.

Westpac economist Dominick Stephens said it was the persistent strength of housing-related inflation from 2002 to 2008 that got the Reserve Bank so agitated. "So it will be very interesting to see how far housing-related inflation has fallen."

Westpac is forecasting no change to the CPI in December, and expects that to be the low point for quarterly inflation. It expects the annual inflation rate to reach 2.6 per cent this year.

Deutsche Bank chief economist Darren Gibbs also expects no change in the CPI in December as a 0.5 per cent fall in tradable prices offsets 0.3 per cent inflation in the non-tradable sector.