Inflation drops to near zero

The cost of living is barely rising at all. Photo / Chris Gorman

New Zealand's rate of annual inflation has dropped to just 0.2 per cent for the year to September 30. It had previously been at 0.4 per cent for the 12 months to June 30.

The Consumer Price Index figure showed inflation was also at just 0.2 for the September quarter.

The figure was slightly higher than some economist predictions but still takes the economy dangerously close to deflation - a phenomenon where falling price expectations start to suppress economic growth.

Housing-related prices continued to be the main upward contributor, up 3.2 per cent in the year. This increase was influenced by higher prices for purchase of new housing, excluding land (up 6.3 per cent), and rentals for housing (up 2.1 per cent).

Property maintenance prices, such as painting and plumbing, have also increased steadily throughout the year and are now 3.1 per cent higher than a year ago.

Transport prices made the largest downward contribution for the year, down 6.7 per cent as prices for petrol and vehicle relicensing fell.

Statistics New Zealand's consumer prices manager Matt Haigh said petrol prices in the September 2016 quarter were 11 per cent lower than a year ago. Petrol makes up around 5 per cent of the CPI basket.

The Reserve Bank has a mandate to keep inflation between 1 and 3 per cent, a band it has not been in for two years now.

"Tradable inflation was stronger than expected over the quarter, despite falling petrol prices and the recent strength in the NEw Zealand dollar," ASB economist Nick Tuffley said. "The RBNZ will also take comfort from the fact that both key measures of core inflation were steady over the quarter even as headline annual inflation fell slightly."

He said he still expected the RBNZ to cut the OCR in November.

"There remains the risk of a further cut in 2017, but this CPI outcome does not add to the case for such a move."

The CPI is a basket of goods and services which includes construction and new housing costs but does not include the bulk of the housing market.